With XYZ at $100, you bought a 2-month $100 Call for $5.00. Breakeven at $105.00. That's the price of the stock at which you won't lose money at expiration.
A few days later, XYZ is trading at $97 and your $100 Call is now worth $3.00. XYZ now has to move 8 points to reach your breakeven point and there is less time to expiration. You feel that XYZ is more likely to go up now, but not as much as 8 points anymore.
You decide to stay long, but lower your breakeven so chances are higher that you can make a profit.
This is how it works:
Suppose that the $95 Call is worth $5.00 ($2 in the money plus $3 in time value)
You can exit your $100 Call by selling it for the $3.00 it is now worth, and sell another extra $100 Call for $3.00 more. You are now net short one $100 strike Call. And you also purchase a $95 Call for $5.00.
Long one 100 strike Call at $5.00 (This Call loses $2.00 and goes down to $3.00)
Sell two 100 strike Calls at $3.00 (Total credit $6.00)
Buy one 95 strike Call at $5.00
The whole transaction is executed for a net Credit of $1.00, which partially offsets the loss on the initial 100 strike Call which had lost value from $5.00 all the way down to $3.00.
Long one 95 strike Call and Short one 100 strike Call, which forms a Bull Call Spread position.
As a result, you are now playing a 95/100 Bull Call Spread, you have a locked in loss of $1.00 (2.00 lost on the first Call but 1.00 recovered during the adjustment). However, the interesting part is that the new breakeven point now sits at 95 + 5.00 - 3.00 = 97.00. Meaning you have drastically reduced your breakeven point from 105 to 97 and therefore increased the chances of winning by expiration. At the same time you reduced your temporary $2.00 loss to a permanent one of $1.00 and that's essentially the consequence of doing this adjustment, you lock in a loss.
The new maximum risk is $200 (difference between prices of the 95 strike ($5.00) and the 100 strike ($3.00) multiplied by a hundred.
You went from having an initial maximum risk of $500, breakeven point 105, and temporary loss $200, to a new position where your maximum risk is $200, breakeven point 97 and a locked in loss of $100.
Obviously, the same technique can be applied with Puts in the event you trade a Put and the stock goes against you by moving up. You can sell twice the number of Puts and by another one at a higher strike price resulting in a Bear Put Spread. Where you improve your breakeven point giving you higher chances of a profitable trade and at the same time your maximum risk is reduced.