In all our Calendar Options trades, we’ve been stressing that our strategy requires establishing positions initially having an even number of contracts, with a minimum of two contracts per leg for a double-calendar and four contracts per leg for a single-calendar. Reader Rob H. writes:

I took the Bonus Trade in IBM (Jun/Jul calendar) and had my order in for 8 contracts. Only one contract got filled at my price, and the market price has kept slipping away ever since. Since I couldn’t get an even number of contracts to apply position adjustments if necessary, do you think I should just pull the plug on this one?

Not necessarily, Rob. With a single calendar spread, our first adjustment strategy is to widen it into a double-calendar. The main reason we want to start a single-calendar with four contracts is so we can make adjustments without having to double the size of our position. For example, if we decided that the amount we want to risk on a particular trade is $3000, we don’t want to be forced to put in another $3100 and throw off the balance of our portfolio. So the split-position approach is intended to prevent an unexpected need for large amounts of new cash that we hadn’t planned to risk on that particular trade.

However, if we had tried to trade more contracts but couldn’t get filled, it’s okay if the adjustment adds to our position (assuming we kept cash set aside for this purpose)—because we had originally wanted a larger position. If IBM were to fall to $121 this week, for example, our usual strategy would be to sell half of our spread at 125 and to buy an equal (half) position in a calendar spread at 120. This would move our lower break-even point down and widen our profit zone, with only a small infusion of additional cash. On the other hand, if we wanted a bigger position anyway, we could just keep our full position in the 125 spread and add to it with a full position at 120, doubling our overall investment in the trade.

If we were to reach a point where a second adjustment is necessary, we could look at it similarly. The typical level-two adjustment would be to sell half of the position at 125 and open a half position in a 115 calendar spread, to form a center-weighted triple-calendar. But if we wanted to increase our position, we could just buy a full position at 115 to create an evenly weighted triple-calendar; depending on what the risk graph looks like, we also might want to add to the spread at 120.

There is one caveat, however. If a position needs adjustment, it might be because the underlying stock and/or the market is getting more volatile—perhaps dangerously so. In that case, we wouldn’t want to increase our risk on a trade that could be spinning out of control, and we’d have to take a loss and move on to the next opportunity. So if we’re sitting on a nice little profit right now (this morning our 125 put spread is trading about 8.8% above where we bought it less than a week ago), it’s worth giving serious thought to the fact that a pretty handsome return might turn into a loss because of the additional risk that a doubling-down adjustment strategy entails.