Sometimes the best move in executing your strategic option trading plan requires you to change course.

In battle, the generals never order an army to retreat. They simply order a "strategic withdrawal" of troops and resources, based on new information and conditions.

Semantic silliness, perhaps, but a valid strategy.

There are a number of reasons why deviating from your original strategic option trading plan may be necessary. Sometimes adjusting a position to create a spread where there was none, or rolling into a different kind of spread, can reduce risk, lock in some profit, or change the trade’s exposure to something more appropriate to the current market environment.

In some cases, creating a more complex position may be the only strategic option. Trading Plan A for Plan B may be the best course of action in certain situations, but it should not be taken lightly. There must be sound justification for changing option strategies. Furthermore, trading a more complex strategy may require more stringent compliance measures. Specifically, the new strategic option trading plan may prompt your broker to require a higher suitability level.

If, for example, you want to change your position to a strategy that requires a Level 4 suitability and you are not approved for Level 4 suitability, you won't be able to execute the revised strategic option trading plan. You won't be able to make the trade that you want.

What to do? Apply for a higher level of suitability in advance.

Options trading firms must ensure that their clients are not taking inappropriate risks. Regardless of their strategic option trading plan, many brokerage firms’ customers are required to complete an options approval form that provides information about their experience, knowledge, and financial resources.

Compliance officers then determine which specific strategic option trading plans are appropriate for you. The process ensures that less-experienced traders do not take inappropriate risks.

It is helpful to be pre-approved for all suitability levels that encompass the strategic option trading plans with which you are comfortable, even if you don’t plan on trading some of the strategies.

For example, if your trading plan is specifically to buy calls to speculate on bullish stocks, your broker may require you to have only a Level 1 suitability. But later, if you’d like to roll one of your long calls into a call spread by selling a higher strike call, you may need a Level 2 suitability.

There are also times when your strategic option trading plan may require adding to a position. (If they’re cheap at $4, they must be really cheap at $3!)

To increase a position, you need to have sufficient margin. If you max out your available capital, there will be limits on your ability to launch a revised strategic option trading plan. It is always helpful to have additional margin capital available, just in case.

Dan Passarelli,

Market Taker Mentoring, Inc.