Savvy Adjustment for Options Credit Spreads
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To be honest I'm not the biggest fan of credit spreads. If used alone, a credit spread is very directional and has a lot of embedded risk implanted into the trade. Although credit spreads mathematically have a high probability, they also have a very high probability of being stressful and extremely risky. However, even though this type of trade is high risk, there are still many option traders in the world that will continue to use them; so in this article we will talk about a very simple adjustment that one can apply to this strategy to lock in profits when it does work out as planned.
As an example, imagine you enter into a credit spread and the market goes in the right direction quickly. Right away your trade is up 5%. You might be tempted to exit this trade at this point, to capture the profit. This seems reasonable. There's a simple adjustment, however, that you can use to lock in your profits and then continue to stay in the trade even longer. All you need to do is add a debit spread to the existing trade in order to neutralize the Delta and lock in profits on your credit spread. This will give you the chance to make money should the underlying asset suddenly move sharply in the opposite direction.
Since it's common for the market to go up and down again and again, this type of adjustment can work out quite well. With this adjustment strategy you can wind up capturing the profit of the credit spread, and making even more when the market reverses. This is one of my favorite ways to lock in profits on a credit spread, and it's also one of the simplest.
As an example of how easy this adjustment can be to make, let's say you're trading the RUT and your credit spread is a bull put spread at strikes 700 and 730. Well, as soon as you realize a profit, just buy a 760 and sell additional 730 contracts. This can end up looking just like an unbalanced butterfly where the number of debit spreads does not equal the number of credit spreads.
This easy adjustment will usually give you a chance to lock in profits and continue the trade. Let me repeat that credit spreads are not my favorite type of trade, but if you like them, then it'll be worth your while to employ a couple of techniques that will lock in your profits. I hope you find these suggestions helpful. If you run with them and expand on this approach, you may well develop some powerfully effective adjustment strategies as an options trader.
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