The Art of Rolling: Adjusting Your Positions Like a Pro
Another Example: Rolling a Long Call
Rolling isn't just for short option strategies. You can also roll a long option, though the reasoning is different.
- Original Trade: You bought a 60-day, $100-strike call on XYZ for $5.00.
- Current Situation: XYZ has rallied to $110 with 30 days left to expiration. Your call is now worth $12.00. You have a nice profit, but you think the stock has more room to run. However, you want to take some risk off the table.
- The Roll: You could roll your position "up and out." You sell your $100-strike call for $12.00 and buy a 90-day, $110-strike call for, say, $8.00.
Result: You have taken a profit of $4.00 ($12.00 - $8.00) off the table, effectively reducing the cost basis of your new, longer-dated call. You still have a bullish position on the stock, but you have reduced your risk and given yourself more time to be right.
The Golden Rule of Rolling: Always Roll for a Credit
There is one critical rule when it comes to rolling a position, especially when managing a losing trade: Always try to roll for a net credit. This means that the premium you receive for the new position should be greater than the debit you pay to close your old position.
Why is this so important? If you have to pay a debit to roll a losing trade, you are increasing your risk and "throwing good money after bad." You are essentially paying to move into a new position that is further away from the money. This is a low-probability move that rarely pays off. If you can't roll a losing position for a credit, it's often a strong sign that the trade is fundamentally broken and it's time to simply close it, accept the loss, and move on to the next opportunity. Don't let a small loss turn into a large one by stubbornly refusing to admit you were wrong.
What is Rolling?
At its simplest, rolling is a two-part transaction that is executed as a single trade:
- Closing your existing option: You buy back the option you originally sold, or sell the option you originally bought.
- Opening a new option: You establish a new position in the same underlying stock, but with a different strike or expiration.
Most brokerage platforms allow you to enter a "roll" as a single order, which can help to ensure you get a good price on both legs of the trade.
There are three primary ways to roll a position:
- Rolling Up: Moving to a higher strike price.
- Rolling Down: Moving to a lower strike price.
- Rolling Out: Moving to a later expiration date.
Often, a roll will involve a combination of these, such as "rolling up and out."
Rolling for Profit: Taking Gains and Extending Duration
Let's say you've sold a credit spread, and it has been a profitable trade. The stock has moved in your favor, and the spread has decayed in value. You have two choices: you can close the trade and take your profit, or you can roll it.
Example: Rolling a Bull Put Spread
- Original Trade: You sold a 30-day, $95/$90 bull put spread on XYZ for a credit of $1.00.
- Current Situation: XYZ has rallied to $105, and with 10 days left to expiration, the spread is now worth only $0.20. You have an unrealized profit of $0.80.
- The Roll: You could buy back your original spread for $0.20 and sell a new 45-day, $100/$95 bull put spread for a credit of $1.50.
Result: You have realized your $0.80 profit on the first trade and established a new position with a higher probability of success, collecting an additional credit and giving yourself more time to be right. This is a common technique used by income-focused traders to continuously generate premium.
Rolling for Defense: Managing a Losing Trade
Rolling can also be a powerful tool for managing a trade that has gone against you. It's a way to give yourself more time to be right, or to adjust your position to a more probable outcome.
Example: Rolling a Bear Call Spread
- Original Trade: You sold a 30-day, $105/$110 bear call spread on XYZ for a credit of $1.00. You wanted the stock to stay below $105.
- Current Situation: XYZ has unexpectedly rallied to $106, and your spread is now trading for $2.00. You have an unrealized loss of $1.00.
- The Roll: Instead of closing the trade for a loss, you could roll the position "up and out." You might be able to buy back your original spread and sell a new 45-day, $110/$115 bear call spread for a small credit.
Result: You have moved your short strike price further away, increasing your probability of success on the new trade. You have also given yourself more time for the stock to potentially pull back. You have not erased your loss, but you have given yourself a chance to turn a losing trade into a winning one.
The Golden Rule of Rolling: Always Roll for a Credit
There is one critical rule when it comes to rolling a position, especially when managing a losing trade: Always try to roll for a net credit. This means that the premium you receive for the new position should be greater than the debit you pay to close your old position.
Why is this so important? If you have to pay a debit to roll a losing trade, you are increasing your risk and "throwing good money after bad." You are essentially paying to move into a new position that is further away from the money. This is a low-probability move that rarely pays off. If you can't roll a losing position for a credit, it's often a strong sign that the trade is fundamentally broken and it's time to simply close it, accept the loss, and move on to the next opportunity. Don't let a small loss turn into a large one by stubbornly refusing to admit you were wrong.
The Risks of Rolling: When to Stop
While rolling can be a powerful tool, it's not a magic wand that can turn any losing trade into a winner. It's important to recognize when a trade is fundamentally broken and it's time to cut your losses.
- Don't Chase a Bad Trade: If you find yourself rolling a position multiple times, and the stock continues to move against you, you may be "picking up pennies in front of a steamroller." Each roll might bring in a small credit, but you are still exposed to the risk of a large, catastrophic loss if the stock makes a huge move against your short strike.
- Consider the Underlying: The most important question to ask before you roll a losing trade is: "Is my original thesis on this stock still valid?" If your reason for entering the trade has changed, then rolling is probably not the right move. It's better to take the loss and re-evaluate.
- Transaction Costs: Remember that every roll involves closing one trade and opening another, which means you will incur transaction costs. These costs can add up and eat into the small credits you might be collecting.
Rolling is a tool for managing a position, not for avoiding a loss. Know when to use it, but also know when to fold your hand.
💡 Conclusion: The Art of Active Management
Rolling is what transforms options trading from a static, "set it and forget it" activity into a dynamic, strategic game of chess. It is the art of active position management.
Here’s what to remember:
- Rolling is Adjusting: It's the process of closing an existing option and opening a new one to adapt to market changes.
- Roll for a Credit: This is the most important rule, especially when managing a losing trade.
- Rolling Can Be Offensive or Defensive: You can roll to take profits and extend a winning streak, or you can roll to defend a position that has moved against you.
Challenge Yourself: Find a stock where you have a clear directional bias. Set up a hypothetical credit spread. Then, imagine the stock moves against you by a few dollars. Go to the options chain and see if you could roll that position out to the next monthly expiration for a credit. This will give you a feel for the mechanics of adjusting a trade.
➡️ What's Next?
You've now learned how to actively manage your positions by rolling them. In the next article, "Assignment and Exercise: What to Do When the Time Comes", we'll explore what happens at the very end of an option's life, and how to handle the process of assignment and exercise.
📚 Glossary & Further Reading
Glossary:
- Rolling: Closing an existing options position and opening a new one in the same underlying asset with a different strike price or expiration date.
- Rolling Up/Down: Changing the strike price of an option.
- Rolling Out: Extending the expiration date of an option.
- Net Credit/Debit: The net amount of money received or paid when executing a multi-leg options trade.
Further Reading: