Defending a trade

For each position: the first move when it goes against you, what that move costs, and the line where you stop defending and take the loss.

Rule 1Roll only for a net credit.Paying to stay in a losing trade is adding to it.

Rule 2Move the side that is not under pressure.Extra credit widens your breakeven. It does not remove the risk.

Rule 3Set the give-up line before you open.A common one for short premium: close at a loss of twice the credit.

Your position	What happened	First defence	What it costs you	Stop defending when
Stock and covered positions
Long shares	Down 5–15% from your cost	Stock repairPer 100 shares: buy 1 at-the-money call and sell 2 calls about halfway back to your cost, same expiry, for close to zero net cost.	Gains are capped at the short strike. The downside is unchanged, not hedged.	The drop is past about 20%, so the repair no longer pays for itself, or you would not buy the stock today.
Covered call	Stock fell; the call is nearly worthless	Roll the call down or outBuy the call back and sell a lower strike, or the same strike further out, for a credit.	A strike below your cost basis locks in a loss if the stock snaps back.	The only strikes paying a credit sit below your adjusted cost basis.
Covered call	Stock ran above the strike	Roll up and outMove to a higher strike in a later expiry for a net credit, or let the shares be called away.	More time in the trade, and the upside is still capped.	The roll needs a debit. Take the assignment.
Cash-secured put	Stock at or below the strike	Roll down and out, or take the sharesRoll to a lower strike in a later expiry for a credit before expiry. Or accept assignment and sell calls against the shares (the wheel).	A longer hold, and the cash stays tied up.	No credit is available, or you no longer want to own the stock. Close.
Short premium · undefined risk
Short straddle	In profit by 25–50%	Buy wings: it becomes an iron flyBuy a put below and a call above at the same expiry, no wider than the net credit you have left.	The wing cost comes out of your profit.	Wings at that width cost too much. Take the profit.
Short straddle	Price is at a breakeven	Roll out in timeRoll both legs to a later expiry at the same strike for a credit. Add a wing on the tested side if an event is close.	More days of exposure to the same strike.	Loss reaches about twice the credit collected, or the roll needs a debit.
Short strangle	One side is tested	Roll the untested side in, then roll outRoll the untested side toward the price for more credit. Repeat until both strikes meet: it is now a straddle. Then roll the whole position to a later expiry for a credit.	Each roll narrows the profit range. The extra credit only pushes the tested breakeven further out.	You cannot roll for a credit, or loss reaches about twice the total credit collected.
Defined risk
Iron condor	One spread is tested	Roll the untested spread closerMove the untested spread toward the price to collect credit and cut the max loss. Leave the tested side alone.	A narrower profit range; a reversal can now hurt the side you moved.	Max loss is already capped. Often the best defence is none: let it stand or close.
Credit spread	Short strike is breached	Roll out in timeRoll the whole spread to a later expiry at the same strikes for a credit.	More time at risk for a small credit.	No credit to roll. Close, or accept the defined loss.
Calendar spread	Stock moved away from the strike	Add a second calendar, or roll the strikesOpen a second calendar at the new price (a double calendar), or move the whole calendar to the strike the stock is near.	More debit, and two strikes to manage.	Loss reaches about half the debit, or the back month's IV collapses.
Long options
Long call or LEAPS	Stock fell; the call lost value	Sell a call above it, or roll downSell a higher-strike call to turn it into a spread and cut your cost, or roll to a lower strike in the same expiry.	Caps the upside; rolling down adds money to the same idea.	Your reason for owning it is gone, or it has lost about half its value.
Debit spread	Stock moved against you	Usually nothing; maybe roll outThe most you can lose is the debit you paid. Rolling to a later expiry costs more debit.	More money into the same view.	The view is broken, or about three weeks are left: close for what it is worth.
Long put (a hedge)	Stock rallied; the put is decaying	Let it work; roll it on scheduleA hedge is meant to expire worthless most of the time. Roll it to a later expiry before its last month.	The premium: the price of the insurance.	You no longer hold what it protects. Sell it.

Managing winners →The trade is working. When do you take it? Practise it →Replay March 2020 in the simulator and defend a short strangle day by day. See the rules in backtests →Our strategies use these exits; see how they did year by year.

Rules of thumb, not advice: disclaimer.