Top 3 trade adjustments, explained by Shubham Agarwal

The rawest form of Trade Adjustments is trail stop loss applied after the trade goes into profit.

Options trading is more popular because of the versatility of the instrument. The existence of multiple instruments for a single stock makes it very interesting.

Trading is all about forecasting. Even if the forecast goes right, it may not take the same path as expected. That is where we need Trade Adjustments in Options. Trade Adjustments means modifications done to the original position to accommodate the move that happened after the trade was taken. The rawest form of Trade Adjustments is trail stop loss applied after the trade goes into profit.

We will talk about 3 such Trade Adjustments to the Options Trade that deals with Profit, Loss and Risk.

1. Profit Locking Adjustments

Let us start with profits. There are ways to adjust your position with the help of stop loss and target. However, with Options the easiest way to do so is by profit locking. Let us take 2 examples of the trades that we would take and how profit can be locked.

Single Option Buy: Let us say we have a stock at 100, expected to go up to 105. We buy 100 strike Call to trade the bullish view. Now the stock goes up to 102.5 in just a day. Here, trailing stop loss could work well but instead, do this adjustment.

Book profit in the 100 Call and Buy 102.5 Call.

Now 1 out of 2 things can happen. 105 comes up the profit in 102.5 Call + Profit in 100 Call will still be same as 100 Call Option till 105.

However, if things were to go down. There is no trail stop loss required. Keep the original stop loss in the underlying and both trades put together could still be in no profit no loss even if the stock reached the stoploss level.

2. Loss Restriction Adjustments

This is a more useful to the positions where there is sell option is involved. Let us say for example you have sell position in 102.5 Call.

If the stock comes to 102.5 and you feel that the sell option position can go into heavy losses. Remember the sell option position has an unlimited risk profile. Cut the risk by Buying a cheaper option here of 105 along with it.

This option should be cheaper than 102.5 sell price. This will help the trade to be protected at the cost of loss of profit, but the protection will reduce the margin making it economical.

3. Dysfunctional Risk cut

This is a separate topic of discussion altogether. But from Trade Adjustments perspective, when we have multiple options in a single trade, some may have done their job but still adds to risk.

For same example, we have a Buy position Future and Sell in 105 Call. This is a bullish trade with 105 Call sold to earn premium. Now, if the closer to expiry 105 Call premium reduces by 80% of our sale price, holding to it will be dysfunctional.

It has done its job. Just get rid of Sell Options that loses 80% of its value from our price as it still holds the same risk for much less reward.

These examples point to 3 different directions; they can be improvised but the purpose will still remain one of the 3.

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