Credit Spread simple adjustment

Back in May I had a question from Matt…

Hi,
I have really enjoyed reading the insights in your blog. I have just started trading credit spreads, and really like the fact that the underlying can move against you a little and you still make money.

I have stumbled upon a “good” problem. In the case above – I am bullish AAPL. I also have a Bull Put Spread on AAPL. However it has moved so that I have only got a small amount left in the spread. I still see AAPL moving up.

What are the best adjustments to capture any further move? I have been considering:
a) buying back the initial spread for a small debit and selling a further credit spread.
b) buying a very OTM put as protection and selling another credit spread.
c) keeping the same spread.

Any hints/advice would be greatly appreciated.

Matt

I responded by stating…

Matt,

You can do any of those. It is more of what you are comfortable with. For my trading I have found it useful when doing adjustments to look at each trade as a new trade.

For example, I examine the stock and trade as a whole new trade. Is it still sound and logical and fit my trading parameters to make a new trade? Acting as if I did not have the old trade at all. IF I find that it is good to place a trade at a higher price point then I usually close the old trade and place a new spread. Taking the profits from the old and making an entirely new trade. I may on occasion just roll up my sold option leaving the bought option at the same strike lowering my commissions but taking on more capital risk. I only do this if I am fairly certain the stock will not break the new support/resistance level, such as in a large gain or drop in one day.

SO I guess what I am telling you is that if there is only a little left to go on the credit spread you are holding, why hold the risk of losing the capital for a mere few bucks more? Just close the trade and be happy with your profit. If the stock still warrants a credit spread make a new trade. For me it may be more in commissions but my peace of mind is worth it.

Dan

Well Mark Wolfinger seems to agree with me in a similar question he received from Dave (I have copied a few key points from his post here)…

There is no ‘best’ way to trade.

There is no ‘best’ way to handle iron condor positions.

I bid to close one side of an iron condor position at my ‘low’ price, regardless of circumstances.  That suits my comfort zone.  I don’t want to take the risk involved with trying to earn the last few nickels. I cover the cheap spread, then consider my alternatives.

I have more than one choice.  I could manage the remaining half of the iron condor as an individual call or put spread.  That means I would close the position if and when it violates my comfort zone.

To read more from Mark about risk management and locking in profits using a simple adjustment go to Options for Rookies-Coach Wolfinger