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AN ESSENTIAL THREAD ON OPTION ADJUSTMENTS
Adjustments can be done in variety of ways & depends totally at the discretion of the trader. To get a clear mind we need to know the following:
1) What to follow,
2) How to make the adjustment,
3) When to make the adjustment. (1/5)
Adjustments can be done in variety of ways & depends totally at the discretion of the trader. To get a clear mind we need to know the following:
1) What to follow,
2) How to make the adjustment,
3) When to make the adjustment. (1/5)
1) We need a way to measure the imbalance created by a delta move in an option strategy. We can measure through premiums, distance from index or delta of greeks (i personally use delta). So basically whatever way of measure we use, both sides should be equal in it. (2/5)
2) Adjustment can either be done by selling extra quantity of profitable side, buying the quantity of losing side or shifting both the sides. I personally shift the sides because with extra quantities our Gamma gets imbalanced & the risk increases if market reverses. (3/5)
3) While the first 2pts are objective, when to make an adjustment is totally subjective. It can be fine tuned through experience. It also depends upon what strategy u are using. For a short strangle the adjustment required is faster than a ratio spread or an IC. (4/5)
Adjustments are a vital part of option trading & the goal should be to adjust spontaneously without any hesitation. A good adjustment system can save you from wild delta moves & even put you on the profitable side. But it takes practice in live trading to develop one. (5/5)
