Last update: July 2021
« Lock-in gains; reduce risk. »
By definition, metamorphosis is “a typically marked and more or less abrupt developmental change in the form or structure of an animal occurring subsequent to birth or hatching.” The word metamorphosis is inherited from the Greek which went straight to Latin and then to the entire Western Civilization.
There are many classic metamorphosis examples, either learned from school (biology, mineralogy), mythology, or from tales of horror:
Caterpillar into a butterfly/moth;
Nymph into a dragonfly;
Tadpole into a frog;
Coal into a diamond;
Man into a werewolf;
Count Dracula into a bat;
Gregor Samsa into an insect.
However, there is one type of metamorphosis that could be crucial for your trading business: morphing an option strategy into another one using trading adjustment techniques.
Markets don’t move linearly. Neither stocks nor currency pairs. Charts morph all the time in erratic behavior, hence the need for traders to be flexible enough to change their approach once a trade turns south and does not hit the predetermined target.
There are two main goals a trader must keep in mind when approaching this type of technique:
- Lock in gains or reduce the position cost;
- Reduce or shift risk.
Learning how to morph your trades could be crucial to your trading business; the key to long-term profitability.
Chart of the Day: Option Gymnastics (From Michael Catolico, 2007)
The infographic above was adapted from Michael Catolico’s 2007 ‘Trade Adjustment Basics’. According to him, “Following the adjacent diagram, you should begin to attune your trading sensibilities to be able to visualize how any of the trade types can become one of the others. By adding or subtracting the pieces, a position can quickly be adapted to suit changing conditions.”
Video of the Day: The Fly (1986) – Trailer
“Be afraid. Be very afraid.”
Trading Justice Episode 339: Black Swan
In this episode of the Trading Justice Podcast, we discuss Black Swan events. Over the weekend, an attack on Saudi oil facilities sent the price of oil skyrocketing. We discuss the overall approach a trader should take when thinking about Black Swan events. Listen to the episode on the player below.
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2 Replies to “Trading Metamorphosis: Lock-in Gains; Reduce Risk”
I for one would be very interested in a sizeable section on adjustments. Take a given trade, see what can go wrong with it, and analyze which adjustment(s) are best given certain market conditions (i.e. buy options if I.V. low, vs. sell them if high), conservative vs. aggressive, and when to place each one (and possibly, remove them also).
Great to know, Eric. Let’s see if other members of the team would be interested in learning trading adjustment techniques.
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