Some of the options traders with whom I converse have shifted to trades they can look at once a day. They adjust only at the end of the day. Others I know, particularly those trading the weekly options, don't have that choice. They might need to react sooner.
I don't trade weekly options, other than sometimes using them as a temporary hedge to a monthly trade, so I can't speak with any authority about the particulars of those trades. I don't daytrade any longer, either, so I can't talk with authority about the tricks of daytrading in the current market environment. I used to know those things, but market environments shift, and tactics that worked in 2000-2004 may not have any relevance today. For the purposes of this article, then, we'll be talking about adjustments to longer-term trades such as iron condors, butterflies, calendars, diagonals, and other such trades on the monthly options.
What time of day is it best to adjust these trades?
Those favoring end-of-day adjustments might point to days such as those in the tan ovals on the chart below.
An options trader whose adjustment point was at 180 on 12/21, the location of the first tan oval, would have seen that adjustment point pierced intraday. By the end of the day IBM had sprung up, creating a bullish-looking candle, obviating the need for the adjustment on that day, at least. An extreme example of such behavior occurred in May 6, 2010, when the SPX dropped to a low of 1,065.79, but sprang back to 1,128.15 by the close. After all, it's what happens by the close, the shape of that daily candle, that tells us what the environment is really like.
So, is it best to adjust only at the end of the day?
Not necessarily. If you glance at that IBM chart, you see some hard down days that end at or near the low of the day and some hard up days that end at or near the high of the day. Those traders who elected to wait until the end of the day to adjust were likely wishing they had adjusted sooner. Adjustments would have likely been less costly and/or more effective if put into place sooner.
That was particularly true, perhaps, of days like 11/23/11 when IBM pierced 180 and kept going lower, only to fall further the next day before gapping up and taking off. Imagine that the trader's plan was to adjust if IBM dropped below 179.50. The trader who waited until the end of the day on 11/23 to adjust probably made that adjustment when IBM was somewhere near the closing price of 177.95 rather than 179.50. That trader might have felt okay about that adjustment the next day when IBM closed lower, but that adjustment might have hurt a bit when IBM gapped up the next day and began what was to be big runup. The trader who had adjusted intraday when 179.50 was breached probably was in less trouble on that rally day than one who adjusted at the end of the day, nearer 177.95.
So, is it better to adjust intraday?
Not necessarily. Iron condor traders sometimes adjust when the delta of a sold call or put approaches a certain number, say -16 or -22 or even -24. What if the trader who fashions himself or herself a technical analyst sees the delta of the sold call or put hitting that action point, but sees that the 200-day moving average is just a little bit away and believes that the price movement may be due for a reversal? Does it make sense to wait out that next test before acting like an automaton and adjusting?
Sometimes it does and sometimes it doesn't.
I hope you're getting the point. There's no one right or wrong way. We have to accept that if we're end-of-day adjusters, sometimes we're going to be really glad and sometimes we'll be singing the shoulda-woulda-coulda song. If we're intraday adjusters and we see a complete reversal in the last few minutes of the day, a hard selling or hard rally, we may be kicking ourselves for making an unnecessary adjustment. If we are technical analysts and choose to let nearby key possible reversal points be tested before we reverse, we're going to doubly blame ourselves if we were wrong to wait because it was not only market action but our misjudgment of that likely action that caused us to wait too long to adjust.
Accept it. Whatever your preferred adjustment point, you're going to be wrong sometimes and right other times. The key may be to choose a method, based on your temperament and the type of trade, and stick to it, realizing that results should even out in the end. The caveat to that is that you must keep an eye on unrealized losses and not let them get out of hand during an intraday move. I believe that not letting unrealized losses get above your planned maximum loss when you entered the trade trumps everything. When you're trading iron condors in size, for example, those losses can get way out of hand, way fast!
Here are a couple of truisms to be considered, however. Even if you're an intraday adjuster or a technical adjuster, try to wait out the first forty minutes at least, if you can without letting unrealized losses rise too much. This gets you past the craziness and weird pricing issues of the first few minutes of trading and lets the markets react to any of the economic releases that often come out at 8:30 and then again at 10:00 am ET. If you're an end-of-day adjuster, consider adjusting before 3:40 pm ET, when MOC or market-on-close orders become visible to those who pay for that information. Professional traders and institutions could scramble at that time to balance out their risks overnight, and pricing can get wacky again for us retail traders. For example, if you're trying to adjust a butterfly by taking off the current butterfly and repositioning it, slippage can be horrendous if you don't have time to work the order a little and must just get it done.
Sometimes, with a complex order, it's not even possible to get it filled in the first few minutes or last few minutes of trading when market makers are squaring up their own risks. If you must adjust in such circumstances and aren't able to get a fill on a complex trade, consider using a long call or put position or maybe a debit spread to stabilize the position until you can get the needed fills.
What do I do personally? When I'm trading iron condors, I try to avoid adjusting in the first few minutes of the day, and I try to get through at least a 30-minute close after a trigger is hit intraday, if I can. Yet those losses can mount quickly on an iron condor and so I don't typically wait until the end of the day. However, I'm attempting to migrate over to the butterfly for my preferred negative-vega trade, and I'm attempting a version that I keep hedged. I am an end-of-the-day adjuster on these, or perhaps I should say I'm a middle-of-the-afternoon adjuster. Because it sometimes takes time to work a butterfly trade and because we can sometimes see the direction of the afternoon by about ninety minutes before the close, that's when I start my adjustments if the day's actions have suggested that an adjustment is needed. This way, I avoid the end of day scramble that sometimes results in worse fills, especially for multi-sided trades. Of course, that means that sometimes I adjust and, in the last thirty minutes of the day, there's a hard reversal that means that I didn't have to adjust at all. Sometimes, the move that gets started right after lunch accelerates into the close, and I'm very glad I started ninety minutes before the close. I'm not all-knowing and can't predict what's going to happen when those MOC orders hit, but I do know that I personally prefer adjusting in the quieter environment about ninety minutes before the close. Many of the people I know wait until thirty minutes before the close.