Today’s post is about adjusting weekly options.
How do you do that? That’s what we’re going to cover today as far as adjustments go should you do it, or should you not do it when it comes to trading weekly options?
It comes directly from one of the questions on youtube. If you have a specific trading question, feel free to reach out and submit one by voice here!
That way, you could submit a question by voice, and we could answer it in more detail.
Here’s today’s question:
“How can you adjust weekly options if they go wrong? Or you have to face the loss and close the trade?”
This comes from this episode:
- Ep 124: Trading Weekly Option Tips: (Earning 9%)
Take a look at this episode if you haven’t, but adjusting weekly options when you’re dealing with weeklies, the concept is no different.
When I look at weekly options, what we’re talking about is trading something shorter-term duration. And if I look at the Russell here, what you can see is you have a three-day expiration, ten-day expiration, 16 days, 24 or 28, so it’s not the standard ones. And then you have 44.
Even the 38-day weeklies are still already longer-term even though they are weekly options; they’re not the standard expiration.
Typically what most people refer to weekly options is something 20 days or less. When we’re looking at something around 16 days, that might be a weekly option. Let’s start there, and we look at the Russell.
Taking a look at the Russell – RUT
The current price of the Russell is right around 1595. Because of that price, we’re going to set our calendar right at the money, whether you do a butterfly, a calendar, or something else. It’s totally up to you. No problem at all.
When we look at this setup, I sold the December 20th right here. This would be December 20th, and typically I’d like to go approximately two weeks out. And that just the difference between the short and the long, the one you’re selling the one you’re buying gives it a little bit of a skew. Or time to expire. And it also gives it a little bit of that theta.
Then what you want to do is about 32 days, so January 3rd would be where I want to set that up. And here’s what we have – January 3rd on the weekly. We could set up this calendar spread right here, and you could set it up pretty much at the money.
You could skew it just a little bit bullish. You could go slightly bearish. It’s up to you. I would do it at the money because these are shorter-term duration. And the whole point and goal are really to get that theta kicking in.
The biggest risk with short duration or these weeklies is ultimately price. That’s because you have a much smaller tent. Price can go against you. You have a fast theta relative to your Vega. It’s not as fast as even a shorter-term duration. But within one Vega problem that you would have, you could make it up in two days of theta.
Your goal with these is just to let them cook for one or two days. And then take your money off the table. That’s because in a couple of days you’re up to about $100 on $700 investment. That’s 13% or so so.
You’re dealing with a fairly good return on investment in just a few days. But the issue of course while price can move down price can move up very quickly on you because these tents are a little price sensitive.
- Can you still do an adjustment for these?
Yes, you can, but I wouldn’t do it once you get too far away. If this in the one or two days move down on me and it was fast or up, then I would probably take the trade-off and reset it.
And I would reset it at the same time frame because there’s enough time. That’s because right now if it’s at 16 days, it might just drop down to a 14-day trade or a 13-day trade. And then you still have enough time.
Then you could just reset the position.
No Point to Adjust
Once you get into maybe seven, six days the same week of expiration, you don’t have a lot of room to adjust.
If let’s say we went a couple of days in and all of a sudden you’re over here on this side or even on the upper side over here there’s no point really to adjust.
That’s because you’re going to get three more, four more days of premium. I would take the trade off take your money.
The other thing is, let’s say you have about ten days to go. If you have about ten days to go and you’re over here, and you want to try to save the position, you could do a slight adjustment if you want.
But typically, the better approach would be this. Let’s say you started with three contracts. I would rather go with let me pare down my position through from 3 contracts to 2 contracts. And from 2 contracts I go to 1 contract a few more days later and just slowly taking it off as the profits keep coming in.
That’s the approach I would take is more of risk management through contract sizes rather than just trying to adjust and tweak that individual position.
Adjusting in a Classical Way
And that’s just because you don’t have a lot of time. Ultimately you could still adjust these in a classical way.
Let’s say this starts moving on to you, and you have enough cash. You could pop another calendar on here, and now you have a double calendar. You could move that over even, and that depends on how much cash you have reserved for the trade.
Of course, you could stack another calendar, but that increases the amount of cash that you’re using there.
Those are my thoughts as far as adjustments go when it comes to adjusting weekly options.
You want to take things cautiously and carefully because there is price movement is probably one of the bigger risks with shorter-term duration.
And if you do an adjustment, you want to be very careful that it doesn’t go against you when you do the adjustment. That’s because now you’re stacking more cash or capital.
Otherwise, the other approach is just if you’re starting with five contracts; you only take one or two off. Then wait a couple more days as profits continue to take another one or two off.
And then take your final positions and contracts off.
I would say that’s another good approach for people starting out.