Random Walk Trading – Adjustment of Butterfly Trade at Risk
Adjustment of Butterfly Trade at Risk
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Most of the time if your short leg gets hit at high speed, the best thing to do is to take the spread off and either move it further back or look for another trade. You could also add a long vertical spread if you think this is going to be a sustained move but then you have the added difficulty of managing that spread in a fast-moving market. This is where it becomes important to use the option chain to your advantage to let you know that, “hey, maybe I should be getting out of this trade when the getting out is good.”
You have to keep in mind that these spreads aren’t really designed to be used with the market moving one way or another at high speeds. You’d definitely prefer a more gradual move. Sometimes traders get caught with a sudden unexpected move. Don’t panic but realize the very real threat that the market could slice right through your spread leaving you in territory where max loss could occur at expiration.
See how Pros adjust the trade using Gold Index as example.
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