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Credit Spread Adjustment


On this page I explain the different ways to carry out a Credit Spread Adjustment, or a Credit Spread Repair. This is sometimes called 'Rolling the Trade', and there are several ways to do it.


This video trading course has extensively detailed demonstrations on how to make a Credit Spread Adjustment, and particularly Iron Condor Adjustments. NOTE: Think of the iron condor as if it were two credit spreads, and then you can use the same principles.

Trading Pro System


Even when you have done all your calculations, and the probability numbers are in your favour, a credit spread trade sometimes goes wrong, and you need to do a credit spread adjustment, or make a repair on your credit spread. This does not have to be a train smash, and most times you can at least get out without making a loss. Generally, if you have done your homework on your trend analysis, you will not need to revert to this strategy, but there are sometimes unpredictable events such as an analyst downgrade, a terrorist event or a panic about the Greek economy. These are mostly unpredictable, but it is also good to keep an eye on the general market (I regularly put up links to good market technical analysis articles on this page).

The Key to the Problem

The whole idea of doing credit spreads is totally dependent on the presence of a strong trend. If you are trading with a weak trend, or have not done your trend research properly, you are asking for trouble - the risk with the trade expands unacceptably. So, do your trend research before you trade! To review:

  • The market should have a clear trend, especially for the S&P500 or the NASDAQ (click on the links for a free analysis). The strength is not so important, but it should be trending.
  • Your stock should have a clear trend, with an ADX of 25 or above, or if you use INO's free trend analysis portfolio (for up to 10 stocks), you should have a trend strength of 80/100.
  • You should be aware of any support or resistance areas coming up.

Having said that, when the trade looks like it has gone wrong, you really have two questions:

  • Has the trend stalled, but with no clear signs of reversal? - you would probably do best to ride it out and let time decay do it's work until expiration. Keep checking daily for signs of a trend reversal.
  • Has the trend reversed? If so, you have a couple of ways to make a credit spread adjustment (sometimes called 'Rolling the trade')....

How to do a Credit Spread Adjustment

  • Before you enter the trade, you should ALWAYS set an exit point or a stop loss. DO NOT leave it to chance, and do not keep chasing the trade, hoping it will turn back. When you hit your mark, get out of the trade - there are plenty more down the road.
    NOTE: I usually set the mark to the point where the cost of buying back the spread that I have sold is exactly double the selling price. I.E. If I sold a spread for $1.20, then I will buy it back if it hits $2.40. This means that I can usually sell another spread for a similar amount, and come out with no loss (and no profit, of course).
  • If the Trend is holding, and there has simply been a deep pullback that threatens your trade, then you can buy back your spread, and sell another one further out. The same trading rules should apply as if it were a new trade (i.e. 80% probability of success). The Risk of this strategy: that your trend has reversed, and you lose the second trade as well.
  • If the Trend has Reversed, and you have objective data for this reversal, then buy back your spread and sell a spread in the OPPOSITE direction. I.E. if you had sold a Credit Bear Spread,then buy it back and sell a Credit Bull Spread. The risk of this strategy: that your trend has not reversed, and it is simply a short term pull back.
  • If the trend is holding and looks like doing so for a longer period, but has the stock has come too close to your exit point, you may want to consider buying back the spread and selling another one in the next expiration month, but one or two stops further out. This strategy can even give you a small profit. The Risk: you cannot be sure how long a trend will remain in place, and you could get caught out again.

What If?

  • there is a Catastrophic Market Reversal, like what happened at 9/11? In this case, you could possibly lose the whole trade. The good thing is that your loss is always limited, so you will not lose your whole portfolio. I usually put an automatic stop loss with my broker to buy back the trade when it hits my emergency exit point.
  • Your exit point is hit one or two days before expiration? This is where I have sometimes taken a hit. It is easy enough to buy back the trade, but selling another spread in the same expiration period is not so easy - there are often no buyers that close to expiration. In this case, I will often sell a spread from the next month, having done all my homework on trend analysis, of course.
    NOTE: Sometimes, if the market is unstable, I have been able to sell a spread up to 24 hours before expiration, simply because volatiliy is very high, and the market is pretty unstable. I don't rely on this, however.

Basic Principles

Remember, have a trading plan, and stick to it. Aim to minimise your losses, not to maximise your profits. Do your trend technical analysis properly - no short cuts or irrational optimism. Do not over analyse - get the data you need and no more, and keep a clear head. If you have done your analysis properly,you should not need to make a credit spread adjustment in more than one trade out of eight - any more than that, and you should reconsider your trading plan!


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