The stock market is a Darwinian environment favoring the evolving trader. Since markets rarely move straight up or down in an orderly manner, traders who maintain a flexible approach are better equipped to not only survive, but thrive.  Options’ versatility allow options trading investors to fine tune their positions for easy adaptation to an ever-changing market. The primary objectives of adjusting are locking in gains and reducing risk.

Any time traders have a profitable long call option they are faced with the fortunate dilemma of either taking profits or letting their position ride in hopes of capturing even more gains. Adjustment trading offers a third option — a compromise of sorts. Instead of selling the call option we could roll to a call vertical spread which simultaneously reduces risk while leaving the position open to additional profits. Consider the following example using the suggested call option purchase on Valero Energy Corp. (NYSE: VLO) from last week’s article (“Buy Calls in Tesoro, Valero, Western,” March 24).

Suppose we purchased the VLO May 28 Call for $2.35 last Thursday. As with all call options the maximum risk is limited to the price that was paid, in this case $235. With this morning’s up gap the call was trading for $3.50 giving us an unrealized profit of $1.15 per contract. Instead of selling the call to lock in the profit we could roll into a call spread by selling the VLO May 31 Call option for $1.80. The new position would be a VLO May 28-31 Call Spread. By receiving $180, our max risk is reduced from $235 to a mere $55. As a trade-off for this drastic reduction in risk, we have capped the max reward at $245 (we own a $3 spread for a net debit of .55). Though we’re now in a limited reward position, our current gain still has room to double. In addition we’ve also hedged our exposure to both time decay and adverse moves in volatility.

Rolling long call options into call vertical spreads is just one of many adjustments that could be made. Indecisive traders owning profitable call options should consider adding this technique to their playbook. It’s an approach that would make even Darwin proud.

Valero Energy (NYSE: VLO)

(Source: MachTrader)

Follow Tyler Craig on Twitter@TylersTrading.