As we head into the unofficial last week of summer, trading has become predictably subdued, with the major indices oscillating on light volume in a trading range. I thought I'd use this relatively "quiet" time to review some recent option strategy suggestions.

While there are currently eight open positions that I've written about before, I want to focus mostly on multistrike strategies, those not yet making a profit and, worse yet, the ones inflicting pain, because deciding what to do in these situations can be confusing and challenging. Unlike the binary buy/sell choices of stock positions (unless you consider those odd analyst recommendations like "strong hold" a legitimate third choice), options trading presents myriad choices.

Winners are easy. Realizing a profit on those long

Fossil

(FOSL) - Get Report

calls should have been pretty straightforward. Here's a good rule of thumb: If a scenario plays out as expected and delivers a 100%-plus gain (especially in less than two weeks), book at least half the profit, raise your stop on the balance, and move along.

It will be more valuable to explore how to reduce risk and bolster profit potential in positions that are neutral or showing a modest profit -- and look at the even tougher decisions on positions that have slipped into the red.

Reducing Costs

Let's start with the bullish position in

Northrop Grumman

(NOC) - Get Report

. Since suggesting the purchase of January 2005 LEAP $95 calls on Aug. 6, Northrop has risen from $90 to $96. This quick 7% gain in the underlying provides a good opportunity to leg into a diagonal calendar spread. With the stock trading at $96, you can sell the January 2004 100 call for $3.50. This would reduce your net debit to $5 while maintaining unlimited profit potential. Unlike a horizontal calendar spread, you're assured a profit selling a higher strike (the diagonal part) even if Northrop runs quickly above the $100 price level. (For those who are curious, the original call, purchased for $8.50, is now trading around $11.)

Speaking of calendar spreads, if you established the one in

gold back in May, you can stick to the program as outlined. With the shiny stuff now trading above $370 (the position was originally established with gold at $362), one can now short the October 375 call for $6.50, which will further reduce the initial cost ($16) of the long February 2004 375 call (the July 375 call shorted at $4 expired worthless).

Sticking by Our Guns

The

paired trades of getting long

TST Recommends

Hilton

(HLT) - Get Report

and shorting

Starwood

(HOT)

using options has slipped into the red. Since the position was established on June 25, with Hilton trading at $13 and Starwood at $28, the spread has widened to $18.20 from $15, as Starwood has climbed to $33.20 and Hilton has only moved up to $15.

As the table illustrates, the option position is currently showing a loss of $2 a pair. While this isn't good, it's certainly better than the $3.20 loss being marked by the underlying pair. The last column shows a hypothetical situation had we followed more traditional pairing rules, which dollar-weights the position, i.e., with Hilton trading at half the price of Starwood, we could have bought four Hilton calls for every Starwood call shorted. The equal-dollar position would now be incurring a loss of only 50 cents a pair.

While this is interesting to think about and hopefully something to apply in the future, the question still remains: What now? With five months remaining, I'm willing to stand pat and see if my thesis works out. One adjustment to consider might be to buy back the short Starwood calls and sell short just one-third the amount of the underlying stock. This would simulate the equal-dollar position, and by switching from short calls to stock, the short delta will go to minus 1, meaning that regardless of the calendar, if the shares retreat, you'd realize the full extent of the move.

Biting the Bullet

Last week's

column, which discussed buying SPX 1015 calls and selling SPX 990 puts (variously called split strike synthetic, squash, combo or fence) looked great for a day, then quickly plunged into the red as the

S&P 500

sank as low as 983 on Tuesday morning. Remember, the break-even point is 990 -- as the price drops below that level, losses mount equal to being outright long the underlying index.

But the S&P rebounded sharply and closed at 996.80 on Tuesday, well within the "no-man's land" between 990 and 1015 in which the trade will be a wash. But that action has one reader's email echoing in my ears: "Every point below the 990 strike adds to the loss on the puts. What if the S&P falls back to 965? That synthetic long could be a silken noose."

Having momentarily averted disaster and not wanting to experience what was so colorfully described above, it's probably sensible to set up a stop-loss level at this point. I'd suggest that if the S&P closes below 980, cut bait and take the loss. As I said, buying the high is a dangerous proposition and not for the faint of heart. Hopefully, the wiggle room provided by the squash allowed you to maintain your composure and the position.

Steven Smith writes regularly for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He was a seatholding member of the Chicago Board of Trade (CBOT) and the Chicago Board Options Exchange (CBOE) from May 1989 to August 1995. During that six-year period, he traded multiple markets for his own personal account and acted as an executing broker for third-party accounts. He invites you to send your feedback to

Steve Smith.