How to adjust short straddles

[Michael Gonsalves]

Based on the views of experts, the following is a summary of the numerous ways in which a short straddle can be adjusted:

(i) Shift the tested side which has become ITM. ITM options have a delta of 1. So, if the straddle is at 15800 and the Index moves to 15900, shift the 15800CE to 15900 or 15950. In other words, convert the straddle into a strangle. If the Index moves to say 15950, shift the 15800PE to 15950PE & convert the strangle to a straddle;

(ii) Shift the untested side. Move the 15800PE to 15900PE (not preferred).

(iii) Shift the entire Straddle in the direction of the move. So, if you have a 15800 Straddle and the Index goes to 15900, shift the Straddle to 15900.

(iv) When the Breakeven point in either direction is reached, sell another Straddle at that Price. This will create a Strangle with a wider range in which you can make money

If Price continues to move against you, close the furthest Straddle and sell one closer to current price to cut deltas in high. However, unlike the first two strategies, this requires you to bring in additional capital.

(iv) Average. So if you have the 15800 Straddle and Price has shot up to 15900 and still shows signs of quickly advancing more, sell a 15900 Straddle to make the overall position equivalent to a 15850 Straddle.

(v) There is also the option of selling or buying a Naked Option to cut deltas.