adjusting trades this class is a production of safe option strategies © and the content is...

Adjusting Trades

This class is a production of Safe Option Strategies © and the content is protected by copyright. Any reproduction or redistribution of this or any Safe Option Strategies ©

presentation is strictly prohibited by law.The information presented in this class is for education purposes only. Safe Option Strategies © does not make any recommendation to buy or sell stocks or options. Trading stocks and options comes with risk and you are solely responsible for any

losses you may incur as a result of trading.

Module 5.1Introduction to Adjusting

Trades

Adjusting Trades

Concept of Adjusting Trades

Rolling Options

Cost Basis – The Most Important Thing About Adjustments


Trades

Stock

What is an Adjustment?

Stocks move up down or sideways.At best we have a 33% chance of being right.What do you do if your guess is not right?Adjustments are secondary exits, or backup plans for when we are wrong.


Trades

Stocks Do Not Often Move in Straight Lines


Trades

Concept of Adjusting Trades

After Defining Our Primary Exit We Have to Ask “What else can the stock price do? (A,B,orC)”

Then we have to ask “what will I do IF (A,B,orC)?”

The Secondary Exit is our Backup Plan if the stock does not go the way we want it to.

There will be times we will have more than one secondary exit.


Trades

•Rolling an Option is buying or selling to close, and selling or buying to open new at a different strike price, different expiration month, or both, in one transaction.•When rolling the option you must factor the net debit or credit of the transaction against your original cost basis.

SC

Rolling Options


Trades

•Currently holding the Dec10 $310 strike short call valued at $10.75/share.•Buy to close for $10.75/share debit and sell to open the Jan11 $320 strike for $11.25 / share credit.•10.75 – 11.25 = -$0.50/share.•Whatever our trade, we have lowered our cost basis by $0.50/share.

Rolling Options


Trades

The Number One Rule of Rolling Short Options

No matter the credit you took in originally, always make sure you take in more credit on your new short option than what it will cost you right now to close your original short option.


Trades

Understanding Adjustments Begins with Mastering Cost BasisAny time we change a trade, (i.e. adding long puts, adding short calls, rolling options, etc.) other than to close it out, we are going to change our cost basis.

We have to know how to recalculate our cost basis every time we adjust a trade.

Recalculating our cost basis is always a matter of simple addition or subtraction.


Trades

•Cost Basis for a Bull Call Spread•$72.50 Long Call for $2.03 / share debit•$75.00 Short Call for $0.98/ share credit•Cost Basis is $1.05 per share

Calculating our Cost Basis


Trades

•Cost Basis for a Bear Call Spread•$72.50 Short Call for $1.98/ share credit•$75.00 Long Call for $1.03/ share debit•Net Credit is $0.95/share•Cost Basis is $1.55/share•Our broker will hold the difference in the strike prices ($2.50) minus the net credit ($0.95) as collateral for the worst case scenario



Trades

•Cost Basis for a Bull Put Spread•$70.00 Short Put for $1.57/ share credit•$65.00 Long Put for $0.59/ share debit•Net Credit is $0.98/share•Cost Basis is $4.02/share•Our broker will hold the difference in the strike prices ($5.00) minus the net credit ($0.98) as collateral for the worst case scenario



Trades

•Cost Basis for a Bull Call Spread•$72.50 Long Call for $2.03/ share debit•$75.00 Short Call for $0.98/ share credit•Cost Basis is $1.05 per share

Adjusting our Cost Basis

•We decide to roll our short calls down two strike prices•$1.05 cost basis plus $1.03 to close our current short calls•Minus $3.40 for the credit taken in on our new short calls•1.05 + 1.03 – 3.40 = -1.32 credit and $1.18 new cost basis


Trades

•Our net credit is $0.95 – ($.20 X2) = $0.55•Or $0.95 - $0.20 - $0.20 = $0.55•Our cost basis is the difference in the strike prices minus our net credit.•10.00 - 0.55 = $9.45 Cost Basis

X2

Adjusting our Cost Basis

•We decide to get rid of one of our put contracts.•Selling one put contract for $0.10 per share lowers our cost basis by $0.10.•9.45 – 0.10 = $9.35 new cost basis.•This also means that our net credit and therefore maximum reward is now $0.65 per share.

X1


Trades

•If we can roll a short call up and out with no addition to our cost basis we can adjust out of a trade that is trending against us.

LC

Adjusting a Calendar Spread by Rolling Options

SC


Trades

•Rolling our short call down in a bull call spread adjusts the trade into a bear call.

LC

SC


Trades

Adjusting a Vertical Trade by Rolling Options

•Rolling both options is sometimes used to simply give us more time in a trade.

LP

SP


Trades

Adjusting a Credit Spread by Rolling Options

•Currently holding the Mar11 $72.50/70 bull put for a net credit of $0.45/share .•Our cost basis is $2.05/share (difference in our strikes minus our net credit)•Buy to close the entire trade for$0.92/share debit. (this increases our cost basis temporarily by $0.92/share)•Sell to open the May11 $70/65 bull put for a net credit of $1.33 (this now lowers our cost basis by $1.33/share)•Keep track of all the math•Starting credit $0.45•Debit to close the trade -$0.92•Credit to open new trade $1.33•New Credit is $0.86•New Spread is $5.00 so the new cost basis (max risk) is $4.14/share.

Cost Basis in Rolling a Credit Spread


Trades

May11

1. Adjusting trades is crucial to success in today’s markets.

2. Adjustments must be pre-planned and flexible.

3. Understanding how an adjustment can effect your cost basis is crucial in keeping track of your profit and loss as well as in creating your adjustment strategies.

4. Rolling options will almost always effect your cost basis in your trade and has to be taken into account before you make an adjustment.

Summary


Trades

adjusting trades this class is a production of safe option strategies © and the content is...

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