Day trades, especially little scalping trades, may be difficult to plan to the degree you do more complex or lengthy trades. You may have to jump on the trade before the opportunity is gone. However, when you place your swing, position or complex options trades that unfold over a longer period of time, you're careful to plan your trade. That plan includes setting a profit target and maximum acceptable loss. Before you ever placed your last trade, you also planned out your adjustment if the trade started going wrong. You hoped you wouldn't need to make an adjustment, but the markets weren't so cooperative with your recent trade. An adjustment was needed.

Now what? You didn't plan your second adjustment. Or your third. Or should there even be a third? Maybe your market outlook has changed between the time when you placed the trade and when you've made a series of adjustments. That happened to me when I placed an iron condor the day before the flash crash. I took off the bull put spreads that day, thankful for the insurance puts that eased the pain. At first, I intended to place those spreads again when the markets settled down. My study of charts led me to change my market view, however. I morphed that original iron condor into a straddle-like position instead and have since morphed it again to an in-the-money strangle. Those certainly weren't adjustments I'd planned before I entered the trade, but they fit my new view of the markets. My new view was that I didn't know where markets were going to go, but I expected volatility and I wanted to benefit from a move in either direction.

I like plans. If the trading environment was conducive, I'd want more than plans or guidelines. I'd want iron-clad rules. However, even I often find myself confronted with after-adjustment questions. Let's take a hypothetical situation with an iron condor trade. Perhaps early in an iron-condor trade, prices zoom higher and I elect to buy a back-month long call position to hedge the short deltas. My hope is that, with so much time still left before expiration, prices will retreat and I won't have to roll that bear call spread. I plan out that first adjustment.

However, once that delta hedge is on, what's my next adjustment if prices keep going up? Negative deltas will be accumulating again, so do I buy more back-month longs? Or do I collect the profit on my first back-month long position, buy back my sold call spread and roll up into a new call spread? Or, now that my back-month longs buffered the loss on the call side, and the put side is now profitable, I could perhaps just take off the whole position for a small loss or gain. If there's enough time left, I can take the small loss or gain that's available and reposition the whole iron condor once the markets have settled.

What if prices retreat instead of going up? Do I hold onto those expensive back-month calls, calls that are leaking value with each point the underlying declines? If I'd bought them based on the delta of the sold call in my bear call spread, do I also base my decision to sell them on the delta of the sold call in the call spread? If I sell those back-month calls at a loss, don't I risk prices bouncing again and having to buy them all over again? If I don't sell them, my expiration graph will be changed to a greater or lesser degree, depending on when in the cycle I bought those back-month calls and how expensive they were. I've permanently lowered the profit potential in my trade, maybe cutting out all potential for gains and just minimizing the loss that I would otherwise have suffered if I'd just taken off the trade when thing first went wrong.

What if I've elected to adjust a butterfly by buying another butterfly as the expiration breakevens are approached, and prices either flare upwards or beat a hasty retreat? What's my next step beyond the first adjustment? Do I add a third butterfly, by which time the margin requirement has jumped way higher than in my original butterfly? Is there another step that's right for me, my account size and trading style?

Obviously, there's no one right answer for each situation. I've long proposed having a trading plan that includes the adjustments you intend to make, but it's honestly not possible to plan each adjustment. Each adjustment you make has pros and cons and presents the possibility of multiple other adjustment possibilities, depending on what happens next.

No iron-clad rules exist, sadly. It's not even possible to write out guidelines to cover each contingency. Fortunately, options are flexible. As long as there's enough time left and adjustments are made in a timely fashion with an eye kept on the accumulating unrealized losses--a problem for me in March--it's often possible to pull a rabbit out of the hat, profit wise, or else ameliorate a loss. It's also possible to increase risk and worsen the position by making the wrong adjustment or the right one at the wrong time. So, what is a trader to do?

Paper trading or back testing an unfamiliar strategy will help many traders figure out the pros and cons of many of the possible adjustments. In fact, I advise graphing some that seem impossible, as you might discover an adjustment that you didn't know existed.

Some mentors or trading coaches prefer for students to use live trades in small lots so that the new traders experience all the emotions that trading decisions trigger. I used to prefer this tactic myself, but in this current market environment, I've changed my mind. I'm personally not in favor of paying too high a tuition to learn a new strategy in the kind of market environment we've had over the last few years. Currently, I prefer to paper trade for at least a few cycles before going live. Paper trading is not imbued with all the emotions that a live trade evokes, but the process does let a trader see the trade unfold in real time. Profit/loss or risk-analysis graphs such as those on think-or-swim, some other brokerages, OptionVue or the freeware OptionsOracle allow traders to try out several possible adjustments. New traders or traders trying a new strategy can watch how that adjustment impacts the trade as time passes and prices and volatility change. When it's time for a second adjustment, the same experiments can be made. Of course, that real-time unfolding has to occur over several cycles before the trader gets a grasp of how a certain adjustment would impact a trade into expiration.

Some platforms have back-trading or back-testing capabilities. They allow traders to test adjustments, including the second and third adjustments, across a number of months. This testing can be accomplished in several hours or days of testing time. This accelerates the learning curve. Traders don't have to wait for the trade to unfold in real time as paper trading and simulated trading require. That acceleration of the learning curve is a great benefit to traders. However, back trading has one drawback when compared to paper trading. Although I said that there's little emotion invested in paper trading when compared to live trading, there is at least some.

There's no emotion in a back test. Not only that, but end-of-day and amateur-hour widening of bid-ask spreads and other factors can sometimes distort outcomes. It's hard to account for slippage, and of course slippage can greatly impact a trade.

To experiment with what works for second and third adjustments, and how the passage of time and other factors impact those next adjustments, should you paper trade in real-time, back trade or back test, or just go live with a small number of contracts? As in most trading decisions, there's no definitive answer. If you've got back-testing capabilities, I would certainly invest some time in running through some months of trading that strategy. Include some months that you know were difficult, such as the March expiration of this year. When you think you know how you want to trade the strategy, having investigated some second and third adjustment outcomes, too, paper trade a few cycles. Then, when you feel that you understand how those second and third adjustments unfold in real time and you feel that you've handled a bad month well, plunge in with some small live trades. If your account is large enough and your confidence firm enough, you can plunge straight into trading small lots, but only if you understand that you risk paying a hefty tuition fee.

What if you don't have back-trading or back-testing capabilities? Some brokerage platforms have rudimentary platforms, such as think-or-swim's ThinkBack. The freeware OptionsOracle supposedly allows one to set up back tests, but I frankly haven't been able to make it work. That doesn't mean it won't work: I'm a klutz sometimes with software. Some serious traders spring for OptionVue, but it's an expensive little toy that I never bought. I can't personally vouch for its usefulness. You can just pull out a calculator and an options pricer--available on CBOE--and do some rough calculating, figuring out the prices of options at various parts of the cycle and after various adjustments. That would be a tedious endeavor. I thought by now that either the CBOE or the OIC might have a back tester available, but I don't find one. I do know of another that's in development, but it's not available yet and I don't know anything about pricing or availability.

I have another suggestion, however. As I've done in the past, I suggest reading Jeff Augen's The Option Trader's Workbook for help with this topic. In this workbook, Augen doesn't stop his what-if questioning with the first instance in which a trade might need adjustment. He goes on to ask further what-if questions. In fact, he asks so many that it's difficult to pick up the book and resume reading it midway through the discussion of a strategy that began many pages previously. You've forgotten the original position and the adjustments that have been made so far. That's one of the criticisms I would have of the book, but I believe its benefits outweigh that negative. I don't always agree with Augen's conclusions, either, but I do agree with the process he forces readers to confront: the process of making decisions and weighing pros and cons throughout the length of a trade, a trade that might require several adjustments.

The lesson here is not to stop your planning with the first adjustment that you'll make if your trade goes wrong. Know that you'll never be able to plan out every permutation of the trade as it evolves. There are just too many parameters and combinations of parameters to do so, but do not stop your planning and testing at the first adjustment. You're worlds ahead of many options traders if you plan out how you'll make your first adjustment, but that's still not quite enough. Keep planning.