RE: [TheOptionClub.com] Comments on the Reverse IC Test and Vertical Adjustments

 

Just looking back over this thread and commenting on an aside referring to
my worksheet...

-----Original Message-----
From: Ricky

<...>
3. I think the test barely scratched the surface as to what could be
done with a reverse IC (combination of put and call debit spreads).
The only adjustment approaches that were considered were doing nothing
and converting the in the money side to a fly. Michael Catolico's
Vertical Adjustment Techniques.pdf, in the Files section of this
group, mentions three other "offensive" techniques to be used when the
spread goes in the money: go long at the short strike, convert to a
condor and roll the spread a strike in the direction of the market.
The latter enables you to take some profits and be set up for more if
the underlying goes in the same direction.

mc- there are many other variants that can be used when a trade is
profitable. These were just some of the more obvious/common. The idea in my
spreadsheet is to look for ways to a) make the trade risk diminish or
disappear completely and b) keep a winner in the game so that further
profits may accrue.

4. The aforementioned pdf also has 8 defensive techniques for
adjusting a spread that has gone further out of the money. I have had
much difficulty in understanding the comment under the "When to use"
column that the first 6 should be done for a credit, at least equal to
the cost of the spread. If the spread has gone further out of the
money from the time you bought it, it seems highly unlikely that you
can get that much credit for those operations.

Mc - the credit is from the adjustment and is of course conditional upon
what the market offers. When you are fighting a losing position the main
thing is to attempt to shift the risk profile so that you can still have a
chance to make some profit given where the market is now trading. Almost
universally this means adding overall net risk to the position in exchange
for a chance to make the trade locally profitable. The effort to make an
adjustment for a credit is meant as a guideline in that the credit
adjustment though technically adding more absolute risk - in effect shifts
risk away from the current, local threat and can potentially eliminate at
least one side of future (directional) risk.

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