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Adjustment Strategies for Stock Option Spreads

When adjusting the delta on an option spread to manage risk, many option traders do not understand how to use volatility to adjust a position in their favor.

For example, let's say you are in a butterfly spread and the market trends up and hits your adjustment point. So what kind of adjustment do you make?

Well, when trading options, it's important to follow the volatility chart as well as the price chart. For example, if the underlying is trending up, it's most likely that the vols are going down (but not always the case). So, when putting on your adjustment, why not put on an adjustment that benefits from falling volatility? (eg. a negative Vega adjustment).

Likewise, if the vols are rising, you might consider putting on a "positive vega" adjustment.

In conclusion, there are many ways to neutralize the Delta position of your options spread. So when comparing your adjustment possibilities, remember to analyze the volatility graph to choose the best Vega adjustment at the same time.

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