Adjustment of Butterfly Trade at Risk

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If your short leg gets hit at high speed, the best thing to do is to take the spread off and either move it further back or look for another trade. If you think this is going to be a sustained move, you can add a long vertical spread, but you have to manage that spread in a fast- moving market. It’s important to use the option chain to your advantage to let you know when it’s time to get out of the trade.

With the market moving one way or another at high speeds, these spreads aren’t designed to be used. You would prefer a gradual move. Sometimes traders are caught by surprise. The market could slice through your spread and leave you in territory where max loss could occur at the end of the day.

The gold index is an example of how Pros adjust the trade.

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