Derivative enthusiasts are quick to trumpet the numerous advantages available in the options market.  For speculators, options are viewed as a cheaper, more leveraged alternative to purchasing stocks.  For extremely cautious investors, they’re looked at as insurance policies.  For the active trader, they offer the ability to customize the risk profile of individual positions. 

Yet another advantage is the ease at which option traders can make adjustments to strategically maximize gains while limiting risk.

I recently suggested a bull call spread on Amazon (NASDAQ: AMZN) in Use Options for a Low-Risk Amazon Bet.  The original trade consisted of purchasing the Oct 210-220 call spread for $440.  Due to the impressive rally staged by AMZN over the past two weeks, the call spread has quickly risen in value to $780.  Most traders would waffle between the decision to exit and lock in the 77% gain or staying the course in an attempt to capture the remaining $220 profit. 

A third alternative, which both reduces risk and allows for the accumulation of additional profits, is rolling up the call spread to higher strikes.

Traders could sell the existing spread for $780 and buy a new Oct 240-250 call spread for $430. This move reduces the capital allocated to the position by $350.  If AMZN continues to rise, the new call spread will accumulate profits at a faster pace than the old spread.  If AMZN declines in value, the new call spread has fewer dollars at risk.  Keep in mind, however, the 240-250 call spread is a more aggressive directional bet requiring a rise in AMZN to $250 by expiration to reach the maximum profit potential. 

Rolling up is a very effective management technique that active vertical spread traders should consider adding to their playbook.

Source:  MachTrader

At the time of this writing, Tyler Craig had no positions on AMZN.