How to Adjust Strangles for Optimal Trading Results

Trading strangles is a powerful strategy for options traders looking to capitalize on market volatility. At its core, a strangle involves buying both a call and a put option with different strike prices but the same expiration date. Traders use this strategy when they anticipate significant market movement but are unsure of the direction. Adjusting a strangle, however, is where the magic happens, especially when the market starts to move against your position.

Many traders fall into the trap of setting up their strangle and then walking away, assuming the market will take care of the rest. But if the market moves drastically in one direction, your strangle could lose value quickly. To avoid such losses, you need to actively adjust your strangle to fit the market conditions. Below, we explore different methods of adjusting a strangle that can help you maintain profitability or minimize losses.

1. Rolling the Strangle

Rolling involves closing your current position and opening a new one with a later expiration date. This is a common adjustment when the market is moving toward the strike price of one leg of your strangle. By rolling the position, you can give the trade more time to work out and avoid taking a loss from early assignment or expiration.

For example, if you have a strangle with a put at $100 and a call at $120, and the market is moving up toward $120, you can roll your put option to a higher strike price, perhaps $110. At the same time, you might roll your call to $130 to give yourself more breathing room. This adjustment is particularly useful when you believe the market will continue moving in one direction, but you still want to keep a balanced position.

Why this works: Rolling allows you to extend the trade without locking in a loss. You also adjust the strike prices to better reflect current market conditions.

2. Adding to the Position

If the market moves significantly in one direction, you might want to consider adding more contracts to your position. This adjustment is riskier but can pay off if you believe the market will eventually move back in your favor. By adding more contracts at different strike prices, you increase the range in which the trade can be profitable.

For example, if the market drops drastically and your put option becomes deep in-the-money while your call is almost worthless, you might add another call option at a lower strike price. This adjustment can help offset the losses from the put option and allow you to capture more profit if the market rebounds.

Key insight: Adding to the position is a way of doubling down, but it should be done with caution. If the market continues to move against you, the additional contracts could result in larger losses.

3. Hedging with Other Instruments

One of the more advanced ways to adjust a strangle is by using other financial instruments, such as futures or ETFs, to hedge your position. For example, if your strangle is losing value because the market is trending upward, you can buy a futures contract to hedge against further losses.

Hedging with other instruments requires a deep understanding of how different markets interact. It can be effective in minimizing losses but also adds complexity to your trading strategy. Traders who are more comfortable with cross-asset strategies might find this approach useful in volatile markets.

4. Early Close to Cut Losses

Sometimes the best adjustment is simply closing your position early. If the market is moving quickly and your strangle is losing value, it might be better to cut your losses rather than wait for expiration. This is especially true if the market movement is based on news or events that are likely to continue in the same direction.

Closing early allows you to preserve capital and look for new opportunities. Remember, not every trade needs to be a winner, and it's better to take a small loss than risk a large one.

5. Iron Condor Conversion

A more advanced adjustment involves converting your strangle into an iron condor. This is done by selling additional options outside of your current strike prices, creating a trade with defined risk and reward. For example, if you have a strangle with a put at $100 and a call at $120, you could sell a put at $90 and a call at $130. This creates an iron condor and reduces the potential for large losses.

This strategy works best when the market is stable and unlikely to make large moves in either direction. The additional sold options help to bring in premium and offset any potential losses from the original strangle.

6. Tightening the Strangle

If the market is less volatile than you expected, your strangle might not be making the profits you had hoped for. In this case, you can adjust by tightening the strangle—bringing the strike prices closer to the current market price. This increases the likelihood of one of the legs becoming profitable, but also increases the risk if the market starts to move quickly.

For instance, if the market is trading at $110 and you have a put at $100 and a call at $120, you might adjust the put to $105 and the call to $115. This adjustment makes it more likely that one of your options will end up in the money, but it also reduces your potential profit range.

Be cautious: Tightening the strangle increases your risk, as the market only needs to move a small amount to hit one of your strike prices.

7. Use of Stop-Loss Orders

Stop-loss orders are an essential tool for any trader, and they can be particularly useful when trading strangles. By setting stop-loss orders, you can automatically close your position if the market moves too far in one direction, limiting your potential losses.

For example, if your call option is losing value as the market drops, you can set a stop-loss order to automatically sell it if the price reaches a certain level. This adjustment helps you avoid the emotional decision-making that often leads to larger losses.

Tip: Always set a stop-loss order, especially in volatile markets, to protect yourself from large swings in the market.

8. Adjusting for Earnings Announcements

Earnings announcements can cause significant market volatility, and adjusting your strangle before such events is crucial. You might consider widening the strike prices to account for larger price movements or reducing the size of your position if you're concerned about the risk.

For example, if a company is about to announce earnings and you have a strangle on its stock, you could adjust the strike prices to reflect the potential for a big move. Alternatively, you could close part of your position to reduce your overall exposure.

Final Thoughts Adjusting a strangle is not a one-size-fits-all process. The key to success lies in being proactive and adapting to market conditions. Whether you choose to roll your position, hedge with other instruments, or simply cut your losses, the most important thing is to stay flexible and not let emotions drive your decisions. In options trading, the ability to adjust is often what separates the winners from the losers.