Position Adjustments are Essential


Let us take two traders (A and B) trading ~90 day index ICs (or credit spreads) with a preference to exit the market 20-30 days before expiration. These traders make exactly the same trades and have the same comfort level and same trading philosophy, except when it comes to making an adjustment:

Trader A always uses the same adjustment method: close all positions at the same time or close in stages.

Trader B sometimes closes his positions and sometimes he uses other adjustment methods depending on his analysis in each situation.

In the long run, and under all kinds of different market conditions, I think trader B will achieve better results (higher annualised returns). The question is how much better?

Obviously, I am not looking for precise figures here, just some kind of rough data/information/comments that could help me decide for myself, if it is worth it (for me) to spend the necessary time to “master” one or more of the available adjustment methods.

Thank you,

Good question. However, the problem is not with ‘learning’ something new. Nor does it have anything to do with your ‘mastering’ anything special. We must look at ‘adjusting’ differently.

As to the final question, I believe that knowing how to ‘fix’ a good, but risky, position is a powerful earnings source. It remains important to exit trades that are not worth salvaging.

An Alternative Perspective

I often refer to ‘risk management’ as if it were separated from ‘regular’ trading. We enter into a trade as a first step, then when necessary, the original position is changed or adjusted.

Consider this perspective:

You own a blank portfolio – with no current positions. No risk. No possible reward.

Next, assume adjustment to that portfolio is made. Deciding that zero risk/zero reward is not what you want to own right now, you buy an iron condor. That trade adjusted (changed) the portfolio. You made a voluntary trade and added an acceptable level of both risk and reward potential.

    I’ve described adjustments as having one purpose: risk reduction. In this scenario, the risk of having no earnings potential was reduced.

Two weeks later, you make another portfolio adjustment by opening a new position. Perhaps it’s a butterfly spread this time. This is another voluntary portfolio adjustment.

Most traders think of an adjustment as involuntary. In other words, they prefer not to make that trade. That is not a good mindset, and only applies when the trader has waited far too long and now has no alternatives, other than exiting the trade. I suggest looking at an adjustment (as it is usually defined) as a voluntary trade. You want to make this trade because it reduces risk and transforms the current position into another that you want to own.

From this perspective, making a position adjustment is NO DIFFERENT from opening a new trade.

When the adjustment is complete, you own a position that you want to own. Isn’t that exactly how you feel when making a new trade?

Thus, you do not have to ‘master’ anything. You only have to know when an adjustment is needed and recognize when a new trade is going to give you an improved position. I believe those are reasonable goals for any trader. Think of ‘adjusting’ a position as working on a partially painted canvas, whereas adjusting a portfolio by adding a new trade is working on a blank canvas.

Just as you make an effort to learn more details about trading your chosen strategies, so too will you learn a few possibilities for ‘fixing’ a troubled trade. There’s no need to be any more of an expert in making these trades than there is in making the original iron condor trade. It may be more fun to open a clean trade, but you will discover that the money is made by improving your positions. I do not believe there is any special edge in initiating iron condors. The edge has to come from good decision-making, and trade execution skills.

As you understand more about options, you gain a better intuitive feeling (but do NOT ignore the risk graphs or the greeks) for which trade type provides needed (even if not the absolute best) risk-reducing, profit-enhancing protection. It is worth the effort.

If you believe than an adjustment is another profit-making opportunity and not a nuisance that locks in a loss, then the whole idea of adjusting becomes so much less frightening and burdensome. It’s just an ordinary trade using options = to do what options do best: reduce risk and (if you elect not to exit) increase the chances of owning a winning trade(defined as making money from the time the adjustment is made).


9 Responses to Position Adjustments are Essential

  1. Dmitry 06/17/2011 at 6:30 AM #

    What would you say on Jared`s approach? Seems logic.

    “Don’t adjust, add: If a position has 3-5 weeks of time left before expiration and the underlying stock or index has moved significantly since your initial iron condor was entered, it’s always better to add another position to your portfolio that takes account of the changed environment, rather than try to “fix” your initial trade. As noted in our next point, there are often good odds that a trade that looks busted will actually recover; but even more importantly, adding position inventory allows you to smooth out your aggregate risk profile.”


    • Mark D Wolfinger 06/17/2011 at 8:31 AM #


      Important question Thanks: I think this requires a longer reply. However:

      a) ‘Always’ is not a good word. I doubt that any idea ‘always’ applies

      b) Adding a new position is another acceptable way to manage the greeks. You can add positive or negative delta (or other greeks) to your portfolio when adding the new trade. That does reduce risk and is a ‘reasonable’ idea. However…

      c) I believe this is a good policy when the adjustment is minor – i.e., there is no thought of exiting, however…

      d) If a position has moved too near to being ATM, if the position is threatening to become a big loser, it is not reasonable to expect the new iron condor to earn enough to offset much of the potential loss from the original. Thus, this idea works as a ‘first’ adjustment, but does not work when the position has breached your ‘I feel safe with this position’ threshold.

      e) I see zero reason to believe that there are ‘good odds’ that a busted position will recover. I am not a market statistician, but you have two ways t go here. You can believe the market will revert to where it was trading earlier (so be careful in strike selection when opening the second trade), or you can believe that the trend is likely to continue. Me, I have no idea where the market is headed, and do not believe that depending on ‘good odds’ for a reversal is a viable strategy.

      f) adding position inventory is worthwhile, but I would not add positions just to add positions. The trader must not over-extend and find him/herself trading too much size or too many positions to manage them efficiently.

      Thank you

  2. Lies 06/17/2011 at 6:44 AM #

    Hallo Mark Wolfinger,

    I want to ask you something different that has nothing to do with positions adjustments.

    It is about expiration.
    Is it correct to assume that there will be an enormous buy-pressure if we have to following open interest in a particular stock with an average traded stock volume of 7.000.000.
    – The open interest of ITM puts is 110.000
    – The open interest of ITM calls is 2.000

    Is there a big chance that there will be a huge buy-pressure in this stock on expiration day with this open interest?


    • Mark D Wolfinger 06/17/2011 at 9:17 AM #

      Hello Lies,

      ‘Big’ chance? It is truly difficult to say. On the face of it, there is going to be many puts for sale, and therefore, many stock buyers [MM who buys puts will hedge with stock].

      The problem is that we do not know who owns the puts and how they are hedged. If some speculator owns them and wants to sell, then yes – big buying pressure. However, that is self-defeating for the put owner, so he/she may look for an alternative.

      If the owner already owns stock and bought the puts as protection, he/she may very well decide to exercise the puts, thereby selling out the shares. If that’s true, then there will be zero affect from the high open interest.

      It makes sense not to be short this stock – but getting long is a gamble. And don’t forget that this information about OI is not secret. ‘Everyone’ already knows about it, and unless the put owner dumps those puts on the market at one time, there should not be big demand in the shares.


  3. Dimitrios 06/17/2011 at 7:06 AM #


    Very interesting way to explain adjustment/risk management.

    Thank you very much.

    • Mark D Wolfinger 06/17/2011 at 9:19 AM #


      I must thank you for the questions. I had not thought about in exactly this way previously, but adjusting should not be considered as a whole different aspect of trading


  4. Don 06/17/2011 at 7:29 AM #

    Mark, that perspective is a visual that will greatly assist my trading and my approach to not only adjusting but the entire process of trading


    • Mark D Wolfinger 06/17/2011 at 9:20 AM #

      I truly hope so.

  5. Noam A 06/20/2011 at 7:57 AM #

    Hi Mark,

    I believe that the saying ” ‘good odds’ that a busted position will recover” refer to the fact that the market dynamics is like knife blade, so it will recover in some way.

    For me, each time i adjust position, it recover back….