In the ever-changing landscape of options trading, the ability to adapt and adjust your positions is crucial for long-term success. This is particularly true for complex strategies like double diagonals and calendar spreads. In our previous article, we explored the fundamental Greeks that influence these strategies. Now, we'll delve into advanced adjustment techniques that can help you maximize profits and minimize risks when trading double diagonals and calendar spreads.

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I. Introduction: The Importance of Dynamic Management

Before we dive into specific adjustment techniques, it's essential to understand why dynamic management is crucial for double diagonals and calendar spreads:

1. Market Volatility: Financial markets are inherently unpredictable, and sudden price movements can quickly turn a profitable position into a losing one.

2. Time Decay: As we learned in our discussion of Theta, the passage of time affects option prices. This effect is not always linear and can accelerate as expiration approaches.

3. Volatility Changes: Shifts in implied volatility can significantly impact the value of your spreads, especially for longer-term options.

4. Risk Management: Proper adjustments can help limit potential losses and lock in profits.

By mastering advanced adjustment techniques, you'll be better equipped to navigate these challenges and optimize your trading outcomes.

Dynamic management strategies for options spreads are actually a part of our weekly roll. Essentially, the roll and adjustment happen at the same time.

II. Identifying When Adjustments Are Necessary

Before we explore specific adjustment techniques, it's crucial to know when to make these adjustments. Here are key scenarios that often warrant adjustments. This discussion is conceptual only, but our trading plan implements #1 and #2 at the same time, while benefiting (usually) from #3-#5 as part of the weekly adjustment, or roll.

1. Significant Underlying Price Movement

   • If the underlying asset moves beyond your predetermined thresholds (e.g., beyond your short strikes), it may be time to adjust.

   • Monitor your position's Delta to gauge directional risk.

2. Approaching Expiration

   • As the short options in your spread near expiration, time decay accelerates, potentially requiring action.

   • Consider rolling options to extend duration and maintain desired exposure.

3. Changes in Implied Volatility

   • Significant spikes or drops in implied volatility can alter the risk-reward profile of your spread.

   • Use Vega to assess your position's sensitivity to volatility changes.

4. Profit Taking

   • If your position has reached your profit target, consider adjusting to lock in gains while potentially maintaining some upside.

5. Loss Mitigation

   • If your position is approaching your maximum loss threshold, adjustments may be necessary to limit further downside.

Key indicators for adjusting options spreads is where the rubber meets the road! Your profit, or loss, is commensurate with your timing and discipline when it comes to trading.

III. Advanced Adjustment Techniques for Double Diagonals

1. Rolling for Duration and Strike Price Management

Rolling involves closing out existing options and opening new ones with different expiration dates or strike prices. For double diagonals, consider:

a) Rolling Short Options:

• Roll short options forward in time to collect additional premium and extend the position's duration.

• Adjust strike prices if necessary to maintain an appropriate risk-reward profile.

• Trade in the right span of Days-To-Expiration (DTE) for maximum benefit.

b) Rolling Long Options:

• If long options are nearing expiration, roll them further out in time to maintain protection and positive Vega exposure. Again, timing is important. Hopefully, the market will offer a good time to move these based on price movement and implied volatility. We’ll walk you through this in another article.

• Consider adjusting long strike prices to better align with your market outlook. You can capture some directional movement while ‘hedging’ your risk.

Example: Original Position (Stock at $100):

• Long 90-day 95 Put and 105 Call

• Short 30-day 97 Put and 103 Call

Adjustment (After 15 days, Stock at $102):

• Keep long options

• Close short options around the third week before expiration. (Exact Days: Premium)

• Sell new 30-day 99 Put and 105 Call

This adjustment collects additional premium and realigns the position with the new stock price. The long calls and puts may profit if the underlying stock or index moves more substantially. This may be increased or offset by volatility.

2. Legging In and Out for Delta Management

We generally do not leg in and out of options for delta management. Our trading allows for some adjustment during the weekly roll cycle. Additionally, proper risk management and sufficient unused capital will protect your portfolio. However, so you understand the concept and if the market moved in such a way you had to employ additional risk mitigation, legging or other types of trades may protect your portfolio.

We will, however, adjust our long option positions to profit or adjust delta if rolling out makes sense at that point. Otherwise, we will most likely wait.

Legging involves adjusting individual legs of the spread separately to manage Delta exposure:

a) Adding or Removing Legs:

• If the underlying moves significantly, consider adding an extra short option on the side the stock is moving towards to collect more premium and reduce Delta.

• Alternatively, buy back the threatened short option to reduce risk.

b) Delta Balancing:

• Adjust the quantity of each option to achieve a desired net Delta.

• This can involve buying or selling small quantities of options or the underlying asset.

Example: Original Position (Stock at $100, Net Delta +0.10):

• 1 Long 90-day 95 Put (Delta -0.30)

• 1 Long 90-day 105 Call (Delta +0.35)

• 1 Short 30-day 97 Put (Delta +0.40)

• 1 Short 30-day 103 Call (Delta -0.35)

Adjustment (Stock moves to $105, New Net Delta +0.30):

• Add 1 Short 30-day 107 Call (Delta -0.20)

• New Net Delta: +0.10

This adjustment brings the position back to Delta neutral.

3. Volatility-Based Adjustments

Given the Vega exposure in double diagonals, consider these volatility-based adjustments:

a) Vega Reduction:

• If implied volatility spikes, consider selling additional short-term options to reduce positive Vega exposure.

• Alternatively, close some long options to reduce Vega if you expect volatility to decrease.

b) Volatility Skew Exploitation:

• Take advantage of volatility skew by adjusting the strike prices of your options.

• For example, in a high volatility environment, you might move your short options further OTM where the skew often overprices options.

Volatility skew usually (but not always) favors the puts on a normal stock, however, the best way to look is see if the At-The-Money (ATM) options are equally priced. If not, the more expensive option (call or put) will be where the ‘skew’ resides.

If you want to learn more about volatility skew tactics for double diagonal spreads and calendars, make sure to subscribe to our newsletter!

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IV. Advanced Adjustment Techniques for Calendar Spreads

1. Diagonal Conversion

When the underlying moves significantly, consider converting your calendar spread into a diagonal spread:

a) ITM Conversion:

• If the underlying moves in-the-money (ITM) for your short option, roll the short option to a further OTM strike in the same expiration. Again, this is done as part of our weekly roll process.

• This collects additional premium and reduces Delta risk.

b) OTM Conversion:

• If the underlying moves far out-of-the-money (OTM), consider rolling your long option to a further OTM strike to reduce cost basis.

Example: Original Calendar (Stock at $100):

• Long 90-day 100 Call

• Short 30-day 100 Call

Adjustment (Stock moves to $105):

• Keep long 90-day 100 Call

• Close short 30-day 100 Call

• Sell new 30-day 107 Call

This adjustment collects more premium and reduces Delta risk.

2. Adding Wings for Protection

To limit risk in a calendar spread, consider adding OTM options to create a modified iron condor:

a) Adding Protective Wings:

• Buy further OTM options in the long-term expiration cycle.

• This caps potential losses if the underlying makes a large move.

b) Selling Additional Short-Term Options:

• Sell OTM options in the short-term expiration to collect more premium.

• This can help offset the cost of the protective wings.

Example: Original Calendar (Stock at $100):

• Long 90-day 100 Call

• Short 30-day 100 Call

Adjustment:

• Add long 90-day 90 Put and 110 Call

• Sell 30-day 95 Put and 105 Call

This creates a modified iron condor with calendar spread characteristics.

We’ve found this is easier in index funds and ETFs as they have less “single stock” event risk.

3. Rolling and Scaling

As expiration approaches, consider these rolling techniques:

a) Standard Roll:

• Close the near-term short option and sell a new short option in the next expiration cycle.

• This maintains the position and collects additional premium.

b) Scaling In/Out:

• Instead of rolling all contracts at once, scale into the new position over time.

• This can help manage risk and take advantage of volatility fluctuations.

This can be done, however, sometimes you are better trying to spend this energy understanding when during a given week is better to roll your particular underlying(s) and sticking to that date/time.

Example: Original Calendar (Stock at $100, 10 contracts):

• Long 10 90-day 100 Calls

• Short 10 30-day 100 Calls

Scaling Adjustment (5 days before expiration):

• Close 5 short 30-day 100 Calls

• Sell 5 new 30-day 100 Calls (next cycle)

• Repeat in a few days for remaining contracts

This approach spreads out the adjustment over time, potentially benefiting from volatility changes.

Scaling techniques for calendar spread management can improve your profit but can also reduce it. I’ve found the constant attempt to guess what the market is doing versus maintaining a trading plan can cause excessive trading and hyper adjusting to a frantic market. Save yourself and look to profit when you initiate the trade instead of reacting to a market.

V. Risk Management and Position Sizing

While adjustment techniques are crucial, they must be paired with robust risk management practices:

WE DO NOT RECOMMEND STOP-LOSSES. HOWEVER, ‘LEVELS’ IS A GREAT WAY TO YIELD MORE INCOME AND REDUCE RISK IF YOU KNOW WHAT TO DO! WE NEVER SET STOP LOSSES AND WE ARE PROFITABLE. YOU CAN BE TOO!

1. Setting and Adhering to Stop-Loss Levels

• Establish clear stop-loss levels based on maximum acceptable loss.

• Consider using options' Greeks (e.g., Delta) or underlying price levels to set stops.

• Stick to your predetermined stop-loss levels to prevent emotional decision-making.

2. Proper Position Sizing

• Never risk more than a small percentage (typically 1-5%) of your total portfolio on a single trade. We make exception to this once you have been trading a while and know how your double diagonal or calendar will trade. On an index or index ETF can be managed better so you can have more capital and/or buying power allocated.

• Consider scaling into positions to average your entry price and reduce timing risk. This can also be corrected by rolls and adjustments.

• Adjust position sizes based on the strategy's risk profile and current market conditions. This is where our trading excels. We make weekly adjustments for trading conditions and profit. It is regimented, but flexible enough to adjust for market conditions.

3. Diversification Across Underlyings and Strategies

• Don't put all your eggs in one basket. Spread your risk across different underlying assets and sectors. This can also be accomplished by trading a single index or index ETF.

• Combine different options strategies to create a more balanced overall portfolio.

4. Continuous Monitoring and Reevaluation

• Regularly review your positions and their Greeks.

• Set up alerts for significant changes in underlying price or implied volatility.

• Be prepared to make quick decisions when market conditions change rapidly.

We have found weekly risk management strategies is the best balance of time/profit for complex options trades.

VI. Tools and Technology for Effective Adjustments

To implement these advanced adjustment techniques effectively, consider utilizing these tools:

1. Options Analytics Software

• Use specialized software to calculate and visualize options Greeks, implied volatility, and potential adjustments. We use ThinkorSwim by Schwab. We also use TastyTrade.

• Popular choices include OptionNet Explorer, and OptionsAnalysis.com.

2. Real-Time Market Data

• Access to real-time option chains, Greeks, and implied volatility data is crucial for making informed adjustments.

• Consider subscribing to a quality data feed if your broker doesn't provide comprehensive real-time data.

3. Automated Alerts

• Set up automated alerts for key levels in the underlying asset, changes in implied volatility, or specific Greeks thresholds. Alerts are fine, but remember, we do not use stop-loss orders due to their ineffective protection.

• Many trading platforms offer customizable alerts that can be sent via email or push notifications.

4. Trading Journals and Analytics

• Keep detailed records of your trades, adjustments, and their outcomes.

• Use trading journal software like TraderVue, Edgewonk or Tradeviz.com to analyze your performance and identify areas for improvement.

We feel the best tools for options spread management should be embedded in your trading platform. If you choose to follow along with how we trade, we recommend ThinkorSwim, as is very powerful and has everything you need on the platform.

VII. Conclusion: Mastering the Art of Dynamic Spread Management

Mastering advanced adjustment techniques for double diagonals and calendar spreads is a journey that requires continuous learning and practice. By understanding when and how to adjust your positions, you can significantly enhance your trading performance and risk management.

Key takeaways:

1. Stay vigilant and be prepared to adjust your positions as market conditions change.

2. Understand the impact of each adjustment on your position's risk profile and Greeks.

3. Always prioritize risk management and proper position sizing.

4. Utilize appropriate tools and technology to support your decision-making process.

5. Continuously educate yourself and refine your adjustment strategies based on experience and changing market dynamics. You can start by subscribing!

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Remember, successful options trading is not about predicting the future, but about effectively managing your positions in the face of uncertainty. By mastering these advanced adjustment techniques, you'll be well-equipped to navigate the complex world of options trading and potentially improve your long-term results.

In our next newsletter, we'll explore how to combine double diagonals and calendar spreads with other options strategies to create advanced, multi-leg positions for specific market scenarios. Stay tuned!

Thanks for reading our post on advanced multi-leg options strategies for experienced traders.