Skip to main content

Managing Spread Positions: Profit Taking and Adjustments

⚙️ The Trade is On: Now What?​

Executing a trade is only the beginning. Professional traders differentiate themselves through disciplined in-trade management. This article covers the essential principles of managing your spread positions, focusing on when to take profits and how to make strategic adjustments.

The Golden Rule: Have a Plan Before You Enter​

Before entering any trade, you must have a written plan that answers three questions:

  1. Profit Target: At what point will you close the trade to realize a gain?
  2. Pain Threshold: At what point will you close the trade to accept a manageable loss?
  3. Adjustment Strategy: Under what conditions will you adjust the trade?

Profit Taking: The Art of Paying Yourself​

The goal is not to maximize every trade, but to consistently generate profit.

For Credit Spreads (Bull Puts, Bear Calls):

  • The Rule: Take profits at 50% of the maximum potential gain.
  • Why? The risk/reward dynamics shift unfavorably after this point. You risk the profit you've already made for a diminishing potential return. Lock in the gain and redeploy your capital.

For Debit Spreads (Bull Calls, Bear Puts):

  • The Rule: Aim to take profits when the gain is 50% to 100% of the debit paid.
  • Why? These are lower probability trades. When they work, you must be rewarded for the risk taken.

Cutting Losses: Protecting Your Capital​

Handling losers is what defines a trader's longevity.

  • The Rule: Define your exit point before entry. A common rule is to exit if the loss reaches 2x the credit received (for credit spreads) or 50% of the debit paid (for debit spreads).
  • Why? This prevents a small loss from becoming a catastrophic one. Hope is not a viable strategy.

Adjustments: The Art of the Roll​

Adjustments can sometimes save a trade that has moved against you. The most common adjustment is "rolling."

When to Roll a Credit Spread:

  • Scenario: A stock moves against your short strike, but hasn't hit your stop loss.
  • Goal: Move your strikes further away and out to a later expiration date, ideally for a net credit.
  • Outcome: You give the trade more time and a higher probability of success. Rolling is a strategic decision, not a way to avoid a loss indefinitely.

💡 Conclusion: From Passive Hope to Active Management​

Successful trading is an active process. It requires a clear plan, the discipline to take profits and cut losses, and the knowledge to know when an adjustment is warranted. This active management is what leads to long-term success.

➡️ What's Next?​

Next, we'll explore "The Impact of Implied Volatility on Spreads," and how changes in volatility can dramatically affect your P/L.

📚 Glossary & Further Reading​

Glossary:

  • Trade Management: The process of monitoring and making decisions about open positions.
  • GTC Order: A Good-Til-Canceled order that remains active until filled or canceled.
  • Rolling: Closing an existing option and opening a new one in a later expiration.

Further Reading: