The Philosophy Of Option Selling

I just finished a book by Dean Koontz called The Good Guy.

It’s about a guy in a bar that gets mistaken for a hit-man. This guy then goes to find the person who is going to be killed and tries to save her, ultimately falling in love and dodging the killer throughout the book.

Anyway, there was one conversation the killer had with the hero that was interesting. The killer tells the hero,

” Good guys finish last, Tim” and the hero responds,

“Maybe not if they stay in the race.”

To me that sounds like adjusting option trades. When we get in an income option trade we want the underlying stock/etf/index to stay right where it is. It can move up and down as long as it does not stray too far from where we want it to be.

Sometimes though, it does move, and it hurts our position. That’s why we adjust. And the philosophy behind adjustments is to stay in the race. If we can stay in the trade and give the underlying enough time to come back to us, we have a greater chance of making money.

So with the adjustment we are giving our underlying more room to move around, and we, as the good guys are still in the race.

Otherwise we would have to exit at a loss. Adjustments give our underlying the ability to move around and eventually come back to us.

The down side is that adjustment cost money. They lower our potential profit as well. So sometimes in hindsight, it is better not to adjust. But you just never know, so I say it is always better to adjust and make a little, than take a risk, not adjust and risk losing a lot.

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