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Adjustments in Index Option selling Portfolios.

Adjustment is a part of Risk management in index option selling portfolio.

Q : Why does it require ?

Me : When you take your trade according to your view, there are chances that, it goes against you.

Now, you have 2 option...Either exit or adjust.

In option selling, adjustment is better if you have enough capital to manage it.

Q : What is pre requisite for adjustment ?

Me : 1. Spare capital to manage your existing trade. You have atleast 25-30% spare capital to adjust your existing trades.

2. Sufficient time to adjust your positions. As you reach near to expiry option premium affected by gamma factor. So, it's difficult to adjust in last 2 weeks.

3. Position size. It's the most important factor to look for when you decide for adjustment. Over position size is difficult to adjust.

4. Market volatility. If market volatility increase, generally, india VIX above 30 is difficult to adjust. So adjustment better to do when VIX is below 30.

5. Experience. Start with small adjustment, manage well, that give confidence in adjustment in future. Adjustment is long term process to learn, but once you learn well then it becomes main part of your Risk management.

Q : When to do adjustment ?

Me : Adjustment depends up on Speed of price movement of underlying. When speed of underlying increase it increase probability for need of adjustment.

Q: How to do adjustment ?

Me : In simple way, you can do adjustment by either shift strike, or shift expiry or add opposite option.

You can reduce speed of underlying by 2 ways..

1. By increasing distance between current price and strike price. ( Shift further OTM strike price) Or

2. By increasing time value of options. ( Shift longer duration expiry ) Or

3. By changing direction. ( e.g. if you sold CE option and market rise, then sell put option to adjust CE option.

Q : Which adjustment suits in different types of market ?

Me : 1. If you sold options and within short time it becomes ATM or ITM...And if you have sufficient time....And your view is not changed...Then only shift strike price further away.(Martiangle)

2. If you don't have enough time in above mentioned condition....And your view is not changed....Then shift expiry with higher time value.(Rollover)

3. If your view will change, then sold opposite options, only condition is, you have sufficient time.(Shifting)

When you take Option selling as Business then like any business you need adjustment. In trading Stop loss is key to survive for longer run, in Business adjustment is key to survive for longer run.