Actually just a quick update here to highlight the power of an “adjustment” in an option position.
In this article I highlighted an example trade in the Euro.
Then in this article I highlighted an example of one way to adjust the original position after a quick profit had accumulated.
Now let’s bring it up to date. 2 days later:
*The original option position has gone from an open profit of +$1,320 (or+52%) to a profit of $240 (or+9.5%). In addition, this trade still has a maximum risk of -$2,520 (See Figure 1).
Figure 1 – FXE original position after 2 days of decline from 3/26 short-term top (Courtesy www.OptionsAnalysis.com)
The adjusted option position has an open profit of +$1,070 and the worst case is a minimum profit of +$725 (See Figure 2).
Figure 2 – FXE adjusted position (Courtesy www.OptionsAnalysis.com)
Summary
These examples are not intended to highlight any timing ability on my part, especially since they are all entirely hypothetical trades. Also, nothing has been decided yet – i.e., if FXE rallies from here the original trade might well end up outperforming the adjusted trade.
However, the point of these examples is to highlight:
*The potential advantages of trading options instead of the underlying shares
*The potential benefits of adjusting an existing option position
With the original trade the pressure is still on the trader. First the trader had a 50%+ profit in less than a week and now much of that open profit has evaporated. This is challenging psychologically (albeit part and parcel to trading in general). Also, there is still a lot of risk associated with this trade – i.e., a loss of $-2,520 is still a possibility if FXE declines in price.
On the other hand, with the adjusted position the pressure mostly “off.” In essence, the trader holding the adjusted position is now playing with the “house money.” While the adjusted position retains unlimited profit potential, the worst thing that can happen is that the position loses -$345 from here and ends up generating a locked in profit of +$725.
Taking the pressure off, letting a profit run, and enjoying a locked in profit “ain’t bad work if you can get it.” Fortunately for option traders, quite often, you can. Which leads me to invoke:
Jay’s Trading Maxim #96: Being able to sleep at night is NOT overrated.
Jay Kaeppel
Disclaimer: The data presented herein were obtained from various third-party sources. While I believe the data to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information. The information, opinions and ideas expressed herein are for informational and educational purposes only and do not constitute and should not be construed as investment advice, an advertisement or offering of investment advisory services, or an offer to sell or a solicitation to buy any security.
