Trading Metamorphosis: Lock-in Gains; Reduce Risk
September 18, 2019
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.
Financial freedom is a journey
Sign up now and gain unfettered access to all of the quality content and powerful Scouting Reports that our Pro Members enjoy for 15-days absolutely free with no strings attached and let us show you what your trading has been missing.
Legal Disclaimer
Tackle Trading LLC (“Tackle Trading”) is providing this website and any related materials, including newsletters, blog posts, videos, social media postings and any other communications (collectively, the “Materials”) on an “as-is” basis. This means that although Tackle Trading strives to make the information accurate, thorough and current, neither Tackle Trading nor the author(s) of the Materials or the moderators guarantee or warrant the Materials or accept liability for any damage, loss or expense arising from the use of the Materials, whether based in tort, contract, or otherwise. Tackle Trading is providing the Materials for educational purposes only. We are not providing legal, accounting, or financial advisory services, and this is not a solicitation or recommendation to buy or sell any stocks, options, or other financial instruments or investments. Examples that address specific assets, stocks, options or other financial instrument transactions are for illustrative purposes only and are not intended to represent specific trades or transactions that we have conducted. In fact, for the purpose of illustration, we may use examples that are different from or contrary to transactions we have conducted or positions we hold. Furthermore, this website and any information or training herein are not intended as a solicitation for any future relationship, business or otherwise, between the users and the moderators. No express or implied warranties are being made with respect to these services and products. By using the Materials, each user agrees to indemnify and hold Tackle Trading harmless from all losses, expenses and costs, including reasonable attorneys’ fees, arising out of or resulting from user’s use of the Materials. In no event shall Tackle Trading or the author(s) or moderators be liable for any direct, special, consequential or incidental damages arising out of or related to the Materials. If this limitation on damages is not enforceable in some states, the total amount of Tackle Trading’s liability to the user or others shall not exceed the amount paid by the user for such Materials.
All investing and trading in the securities market involves a high degree of risk. Any decisions to place trades in the financial markets, including trading in stocks, options or other financial instruments, is a personal decision that should only be made after conducting thorough independent research, including a personal risk and financial assessment, and prior consultation with the user’s investment, legal, tax and accounting advisers, to determine whether such trading or investment is appropriate for that user.
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.