Trading Adjustments For Protecting Short Options

The trading discussed on this video is a very good example of making options trading adjustments and protecting short option strikes – by legging into and out of spreads when synthetic day trades are done.  Depending on the direction of the trade, a short option will become covered as a debit spread or remain short as a credit spread.

Credit Spread Adjustment Protection

Still discussing the -535c +540c X -515p +510p credit spread combination in the context of day trades and price location:

  • Trading to protect either of the spreads
  • Legging out of either of the spreads to use one of the strikes – for instance, closing the short put to be long the 510p

The video starts after a pmd failure that could continue a day trade short swing, or reverse into a buy:

  • There was a reverse into a buy = +525c -520p – and closes a long put from a previous +520p
  • When the put was long the short 515p in the credit spread was covered as a debit spread – when it is closed it is a credit spread again
  • When the call was bought a 530c short done on the open was covered as a debit spread

This buy went to resistance and back into sell:

  • The long 525c was closed – leaving the short 530c uncovered
  • The 520p was bought again – and covered the short 515p as a debit spread

The market went down to the lows and support – this was into the close, and at that point an adjustment to sell another put and buy a call.  This gave a closing position of debit spreads on top of credit spreads:

  • +c -c -c +c X +p -p -p +p

Through the day trading entry timing adjustments and legging into and out of different strikes to adjust from debit spread protection to shorts, or credit spreads only, based on the directional trade at the time – we were able to end up with a position that gave:

  • Further protection to the credit spreads
  • Even though they could not lose as a combination, now neither leg could lose – because the debit spread would be a full profit first