Rolling

There’s a little more options lingo in this section than elsewhere on the site. It’s safe to assume if you don’t thoroughly understand the terminology, you should learn more about options before attempting this maneuver. Rolling is for experienced option traders and if you attempt a Rolling strategy without being completely educated in Rolling techniques, it can cause you to lose money.

Adjustment Trades are trades I make to hedge, cover, partially exit or any other move I might make to better my position. These adjustment moves are me reacting to a move in the market both desirable and undesirable. The road to success is not always a smooth road, sometimes you hit bumps, dips and detours, you must make adjustments. These road hazards cause you to make moves. These moves I call “Adjustment Trades.”

Rolling is one of the most common ways for traders to “adjust” an option position. It’s possible to Roll either a Long or Short option position, but here we’ll focus on the Short side. You must understand what a Short Position is, and understand that you are selling something before you buy.

On this page you will learn about a few Rolling strategies, Rolling Out (forward), Rolling up and Rolling Up & Out.

Every options trading scenario is different. Sometimes you’ll sell a call option, nail the directional move you desire 100%, and exit the strategy a big winner upon expiration. Sometimes, however, your position might need some fine-tuning in order to achieve its maximum potential. Here, we’ll discuss different methods for rolling options, whether you’re looking to adjust your position out, up, or up & out. There are also techniques to Roll down in the case of Puts but I will not cover that here. Once you master the techniques for Rolling Short Calls, Rolling down will come with common sense.

I must comment on something I just said. It has to do with maximum potential. When it comes to trading there is nothing like having your trade get it’s maximum potential. However, I personally do not make too many adjustment trades for the sole purpose of getting maximum potential. I am not bent on maximum potential! I’m bent on leaving a trade a winner! My philosophy is, making one or many adjustment trades for the sole purpose of getting maximum potential is a sign of greed and in this game greed will get you. Many traders Roll to get maximum potential especially when it comes to Covered Calls. Some traders will not except the Opportunity Lost. I will cover this when talking about Covered Call Rolling below.

Rolling a trade is one way to manage a winning or losing position. To roll a trade, we simultaneously close our existing position and open a new one. We can change the Strike Price, Expiration Date, or both. Here on “Main Street beats Wall Street,” I look at rolling as a defensive tactic and roll for more time to help ensure a winning trade. I will only roll if my assumption on where the underlying stock is heading is still the same. If my assumption has changed, I look to close the position or let the trade play out and accept a possible loss, and move on.

Roll Out

“Rolling Out” means that an expiring option position is being replaced. The replacement trade will involve the same underlying stock with the same Strike Price. The only difference will be the Expiration Date will change. My original position was entered with a “Sell to Open.” I am selling an option, which is a short position. To do a Roll Out I close this position and simultaneously open another position further out in time. I will “Buy to Close” the expiring original position and “Sell to Open” a new position to give me more time for my trade to develop into a winning trade. Let’s go over this with an example: (you must understand the Option Order Form) Hit link.

Original Trade

1/1/16 Sell to Open 10 XYZ 1/15/16 $20 C @ $1.00 (+$1000)

This is an order to sell 10 Naked Call contracts of XYZ corp to expire on 1/15/16 and the Strike Price is $20. This order was sold on 1/1/16 and the stock price was $19. The seller (Joe) of this option gives the buyer (Tom) the right to buy 1000 shares of XYZ corp any time between 1/1 and 1/15 for $20 per share. The buyer paid a premium of $1.00 for a total of $1000. On Expiration Day the stock is at $21. Joe is very concerned because he’s obligated to deliver 1000 shares of XYZ stock at $20, he does not own the stock so to get the stock he has to buy it for $21. He would lose $1 per share on the stock for a total of $1000. Joe had the assumption XYZ corp would not go above $20 and still feels it will drop below $20 soon. Instead of taking the lose he decides to do a Roll Out. He must replace he original trade which means he has to Buy to Close that trade and open another position.

Roll Out

 1/15/16 – Buy to Close 10 XYZ 1/15/16 $20 C @ $1.50 (-$1500)

 1/15/16 – Sell to Open 10 XYZ 2/19/16 $20 C @ $2.00 (+$2000)

Joe’s original trade brought him in a premium of $1.00 for a total of $1000. To get out of his original position with the Roll Out it cost him $1.50 for a total of $1500, a $500 lose. With the Roll Out he extended the Expiration Date out to 2/19/16 with the same Strike Price. This premium had more Time Value and he received a premium of $2.00 for a total of $2000. If Joe’s assumption is correct and the stocks falls below $20 on 2/19/16 the new Rolled Out position will expire worthless. He got out of his original position with a $500 lose and his new Rolled Out position expired with a profit of $2000 for a total gain of $1500.

Roll Up

“Rolling Up” means that an option position is being replaced with another with the same Expiration Date but with a higher Strike Price. This is a strategy I never do! When I Roll Out or Roll Up & Out I perform it on Expiration Day. If I perform a Roll on Expiration Day how could I only Roll Up the Strike Price? If it’s Expiration Day I would also have to Roll Out the Expiration Day. This will no longer be only a Roll Up. I hope this makes sense. The reason I only perform Rolls on Expiration Day is if I’m going to Buy to Close my original position I want to buy if for the cheapest price. On Expiration Day the option will be at it’s lowest price because there’s no Time Value remaining. Time Value is a major part of the value of an option.  Below is an example of a Roll Up on a short Call (Selling a Call).

Original Trade

1/1/16 – Sell to Open 10 XYZ 1/15/16 $20 C @ $1.00 (+$1000)

This is an order to sell 10 Naked Call contracts of XYZ corp to expire on 1/15/16 and the Strike Price is $20.This order was sold on 1/1/16 and the stock price was $19. After only one day the stock went up to the $20 Strike Price. You can buy the Call back and Roll it Up to a Strike Price of $21. You do this in hopes you never have to deliver the stock. Here’s an example of a possible Roll Up:

Roll Up

1/2/16 – Buy to Close 10 XYZ 1/15/16 $20 C @ $2.00 (-$2000)

1/2/16 – Sell to Open 10 XYZ 1/15/16 $21 C @ $1.00 (+$1000)

When the stock goes up and you Roll Up without Rolling Out the best case scenario is you will break even. It’s just the way the value of options work. Rolling up on a short Call in not the most popular strategy. I never do it. Roll Up’s are more common when buying options, which I also don’t do. If you’ve bought a call option and the stock makes a quick, dramatic move in your favor, Rolling Up is a way to raise the bullish stakes. You Sell to Close your existing call option at a profit, and Buy to Open a higher strike Call for a smaller amount of money. In this way, you’ve locked in some gains on your initial trade, and you’ve also acquired some fresh leverage to profit from a continued move higher. Not my thing!

In the Roll Up above there was a Call sold with a premium of $1000. With the Roll Up there was a Buy to Close which cost $2000 for a $1000 lose. The Roll Up sale brought in a premium of $1000 to make the entire deal even. This is a way to possibly get out of a bad situation with out losing money.

Roll Up & Out

This is probably Rolling the strategyI use the most. Maybe the only one I will use. If you look in my trade History you might see a few. This involves the two strategies above. This involves getting into a new position changing both the Strike Price (up) and the Expiration Date (out). I will use the same original trade as above and do a Roll Up & Out.

Original Trade 

1/1/16 – Sell to Open 10 XYZ 1/15/16 $20 C @ $1.00 (+$1000)

This is an order to sell 10 Naked Call contracts of XYZ corp to expire on 1/15/16 and the Strike Price is $20. On Expiration Day (1/15/16) the stock was up to $21. The sell does not want to deliver the stock at a lose so he does a Roll Up & Out.

Roll Up & Out

1/15/16 – Buy to Close 10 XYZ 1/15/16 $20 C @ $1.50 (-$1500)

1/15/16 – Sell to Open 10 XYZ 3/18/16 $22 C @ 2.50 (+$2500)

In this situation the stock went up to $21 but the seller wanted to go up another dollar on the Strike Price. In doing that, in order to get a premium where the Roll Up & Out was worth it, he had to go out on the Expiration Date another month to March. This is a very real situation. If on Expiration Day the stocks below $22 the option will expire and it will be successful. The original trade brought in $1000. It cost $1500 to get out of that trade and he is now down $500. With the Roll Up & Out he brought in another $2500 for a total gain of $2000.

If at the Expiration Date of the Roll Up & Out the stock is above the new Strike Price, he can do another Roll Up & Out. You can do this over and over while you pray for the old say to come true: “What goes up must come down”

Covered Call Rolling

This is a strategy for someone who has a fear of getting Assigned or does not want to have an Opportunity Lost.

If someone is writing Covered Calls and the underlying stock makes a big unexpected move, he might want to do a Roll. Example: The Buy-Write was done with the stock at $19, with the Strike Price of $21 and the stock goes up to $24. This seller of the Option might want to buy his way out of this contract and sell another with a Roll Up & Out strategy. If his assumption changes and he feels the stock might go up to $27, he might go with an Expiration Date further out and with a higher Strike Price so he can capture the gains on the stock. If he sold the $21 Call and the stock went up to $24, he would have to deliver the stock at $21 and have an Opportunity Lost. If he never sold the Call he would not have to deliver the stock for $21 and he would make the extra $3 on the stock.

If you are a reader of Main Street beats Wall Street you will know I don’t worry about Assignment or Opportunity Lost. I’m in this game for the premium and possibly a little stock gain. The books will say I’m crazy! But take a look at my results in my trade history. The reason they’re writing books is because they don’t have these results. I stay disciplined and stick to my plan. I do make adjustment trades but most of the time it’s to prevent a loss not to make more money. In the past I’ve done it and it didn’t work out too well for me. “Slow and steady, steady and slow.” The tortoise  wins the race!

If you have any questions on Rolling please email me.