Adjustment

Options adjustments are typically measures a trader takes to reverse or reduce losses that have been incurred because the market has moved against one of their positions.

Adjustments can also be used to lock-in a profit or adapt an existing position to take advantage of market conditions.

It is important to understand the difference between defined risk trades and Options trade adjustments.

Defined risk strategies such as vertical Spreads where individual legs are both sold and bought set an absolute limit on the total amount that can be lost (as defined by the width of the spread). For credit Spreads in particular, however, the loss can be considerably greater than the maximum gain (often many times larger in the case of credit Spreads).

Adjustments involve modifying the original strategy by buying or selling additional puts or calls before expiration. They change the nature of the position with the objective of making it more suitable for the current market conditions and therefore avoiding a far greater loss if no adjustments were made.

There are a range of different adjustment strategies that can be used by Options traders. The flexibility of Options as an instrument class provides many opportunities to limit losses and repair or transform losing positions into profitable ones.

On some occasions, however, it can be less complicated and lower cost in terms of commissions and capital at risk to simply exit a trade for a small loss rather than pursue a complex adjustment strategy.

A further consideration to weigh up before making adjustments to Options positions is the additional amount of mental effort and management time required to assess the implications and monitor trades, which could alternatively be more profitably put to use on a different trade.