Last weekend, I sent out my Options 101 article early in the morning, hoping that some of the ideas would help traders position their portfolios before the weekend. I worried about the big moves we'd been getting and about the fact that the hype over the debt crisis was concealing concerns about a weakening economy. I didn't know which direction the markets might break, but I thought the move might be fast once it did begin.

Was it ever. I truly hope some of you took my suggestions to lock in at least partial profits in profitable trades, lower risk in ones still underwater, and consider holding off on entering new trades or at least enter them in smaller size. I have heard of some carnage in some traders' accounts this week, even seasoned traders, and it hurts to hear about times when losses grew too big. Because of the market conditions, I'm again sending this article out early.

I still don't know if my own trades will end up being profitable, but I do know that I ended last week with the risk hedged--taking my own advice to have protective puts in place--and I spent all week making sure that my risk was reduced, too. Theoretical profit-and-loss charts can't always be trusted, especially at the end of the day when some market makers put in wide bid and asks, but if they are to be believed, my SPX SEP iron condor accumulated $172.50 in losses on Thursday's debacle. I ended the day with the position having a delta of 7.69, so that it wasn't going to suffer much from an overnight price movement in futures or the reaction to the jobs number, whatever that reaction will turn out to be. I already had accumulated some unrealized losses, but so far I've been able to keep those losses from growing bigger than my planned maximum loss of just under $2,000 for this trade with a maximum margin of $18,040. I've chosen to hedge risk using methods that take off margin risk, not increase it. For example, I did not choose to roll threatened put spreads down into more spreads at a lower strike, to make up the debit I paid to roll. Instead, I chose to buy back sold options when needed.

Earlier in the week, I'd received a thoughtful question from a subscriber about adjustments. Thursday, that subscriber and others were on my mind. Many of you are seasoned traders who could teach me a thing or two, but some of you might not be accustomed to thinking about what adjustments change the risks in which ways. I thought I would list some for you to think about but I do so with caution. These market conditions are not times to be experimenting with unfamiliar strategies. For a global recommendation, I would still stick with the recommendation from last Friday morning: consider adjustments that reduce risk.

If markets are headed down and your position is a positive delta one, so that it's getting hurt by price movement, you might be looking for ways to lower the delta. Some of those ways include buying a put, buying back a sold put, buying a put debit spread (buying one put and selling one at a lower strike) or selling a call credit spread (selling a call and buying a higher strike call).

We know by now that there are not free rides with any choice we make, so let's discuss some other considerations. If you're buying a put in a sharply declining market, you're going to be paying an exorbitant price for that put. A related concern is that long puts are vega-positive choices, so that if the market settles and volatility comes out, you'll lose money even if prices don't rise. Some people choose to buy a put debit spread or sell a call credit spread if they're worried about a collapse in volatilities because these somewhat ameliorate that effect: if the put you're buying is expensive, for example, so is the one you're selling, likely. Thursday, I was buying in puts. I didn't use debit spreads. The move was so sharp that I wanted to lower my risk by buying in a put I'd already bought. I'll resell it when I think the markets have settled. In addition, in a sharp move, I was a little afraid that I wouldn't be able to get a spread executed, and I did hear of some who couldn't. In fact, the volatility was increasing so much that I couldn't close my call credit spreads, spreads that should have been narrowed enough to let me take my appropriate profit. Even if I'd chosen to control risk that day by selling more call credit spreads to lower my delta, I wouldn't likely have gotten the effect I wanted. That would have increased risk, too, even if it didn't increase margin, depending on the mix of call to put credit spreads. We can't predict when a sharp technical bounce might occur, and the call credit spreads I might have chosen to sell on Thursday could quickly be overwhelmed.

If markets are headed up and your position has too negative a delta, so that it's getting hurt by price movement, you might be looking for ways to raise the delta. Those include buying a call, buying back a sold call, buying a call debit spread (buying a call and selling a call at a higher strike) or selling a put credit spread (selling a put and buying a put at a lower strike).

These are just a few examples of tactics you can consider. More advanced ones include OTM butterflies for the trader who wanted to be directional and thought that volatilities were ready to collapse and other such trades, but I consider them dangerous in this kind of market. In my own trading, I wanted to be as straightforward with my trades as possible. The point is to experiment on paper or on a profit-and-loss graph, and figure out what works for you.

One of those other tactics I mentioned last week is always workable to lower risk: take the trade off. Once it's off, there's no more risk. I can tell you that I know of some people who were glad they pulled the plug on their trades. At one point on Thursday, when the SPX made an interim low and then immediately bounced hard, I resold one of my puts, thinking that the low might be in for the day. I had a plan, one that included immediately buying back that put if my supposition was proved wrong, which would happen if the SPX rolled over and dipped beneath that interim low. It was hard to buy back that same put again, worrying as I did about the possibility for a strong rally into the close with collapsing volatility, but I adhered to my plan. Was I ever glad I did. That put was worth another $480 by the close, helping to protect my position from further losses. It would have been a lot more expensive to buy back nearer the close, if I had convinced myself that after 50 points of losses, the SPX had to bounce into the close.

Another guideline to tell you it's time to close the trade is to check your emotional wellbeing. If you're panicked and feel as if you're in over your head, you're not going to be in a good place to manage your trade. You can bet I'll be asking myself that question by today's close since I have to travel on Monday and can't guarantee access the whole way via my air card. If I can't adjust my trade and set up appropriate contingent orders so that it's relatively safe while I’m gone, that trade will come off or at least a lot of the risk will. One note: we're obviously seeing wild moves. If you're legging out of trades and the market reverses on you, you may accumulate losses higher than you anticipated. Do try to close your spreads, butterflies, calendars, or condors as units, if you can. You may not be able to do so, and, if not, it may be better for you to leg out in small lots rather than all at once. Calculate what each trade would do to the Greeks of the trade and make sure that it doesn't leave you too vulnerable in case there's a quick reversal of the move underway.

I truly hope all our subscribers weathered the carnage. I want to advise that you not be too quick to jump in with new trades. Perhaps they'll work beautifully, but if you think that the losses this week mean that we can't see any more, then take a look at an SPX weekly chart for the week of 9/29/2008. The week before, the SPX had closed at 1,213.27, but fell the week of 9/29/2008 into a close all the way at 1,099.23. As bad as that was, it was only a warm-up exercise for the next week. The next week, the SPX closed at 899.22, after hitting a low or 839.80.

We could just as easily see a huge bounce back to a 38.2 or 50 percent retracement of the losses of the last few weeks. We don't know. This would be a good time to paper trade some of those adjustments listed above while you wait for the markets to show you what comes next.