Last week the market continued lower despite being deeply oversold, putting one of our Calendar Options positions in adjustment territory for the second time. It’s been a wild ride for EEM: After a decline of more than $3 Wednesday, the ETF dropped another $1.50 in early trade Thursday morning, to a low of $127.92, then rallied back above $130 before retreating again with the rest of the market.

IYR fared better last week. Even though the real-estate ETF fell along with almost everything else, we still were showing a profit of about 8%. If support in the $59 area fails, we’ll probably hit an adjustment trigger before IYR consolidates or rebounds. Tuesday morning’s pending home sales data will likely be the catalyst for any major move, up or down. But it’s EEM that we need to keep our eyes on this morning.

On Thursday the emerging-markets ETF closed almost $4 under where it was when we made our first adjustment. EEM was well below our lower strike and was fast approaching our adjusted break-even point. What’s more, shifting implied volatilities had let some air out of our double-calendar adjusted position, pushing our current projected lower break-even up to around $129. Ordinarily we would’ve adjusted the trade Thursday before the close, but a thin market in the final hours before the holiday weekend had option prices bouncing off the walls.

So what we’re looking at right now are four possible scenarios:

• If the market rallies today and EEM goes along for the ride,. . . Yipee! We’re back in the profit zone.
• More likely, EEM will stay flat or move lower, at least for today. In Wednesday’s post about How We Adjust, we wrote that it’s usually best to spread out our position when the market gets volatile, but sometimes it’s better to roll to a single strike. This may be one of those times. Although our textbook adjustment at this point would be to roll half of our remaining 140-strike position down to 125 or 120, rolling all of the remaining contracts at 140 to 130 actually might result in a better risk profile.
• The other option, in case of a decisive downward move, would be to roll all our contracts at 140 even lower, to 125. If EEM plunges below $126, this might be the best choice.
• As a last resort, we might have to stop out—we closed Thursday uncomfortably near the range of our 20% to 25% maximum loss, and a gap down this morning would put us well into our stop-loss zone. But we’ve had three days for time decay to work its magic (option pricing models typically calculate time decay based on calendar days, not just trading days), and if we can eliminate most of our delta risk without killing theta, and come out with break-evens reasonably close to technical price support, we’re going to try to stay in this position long enough to end up with little or no loss.

What’s tricky about this (probable) adjustment is that we’re in a place where the chart tells us we could see a dramatic reversal, but perhaps not until there’s a climactic sell-off. EEM could shoot back up to $135 in a matter of one or two days—but it could just as easily plunge to $125 in the same timeframe before rebounding,. . .or dropping further. Unfortunately, we can’t tell the future; that’s why it’s important to exercise discipline when trading instead of succumbing to hope or fear, and that means following our trading rules, adapting to current conditions, and controlling our risk by stopping out if necessary.