Despite your best efforts (and analysis), sometimes positions go against you. Your timing or directional bias simply didn’t align with the market and your trade is a loser as expiration approaches.
What can you do?
Rolling positions is an effective way to extend a trade’s duration and allow the position more time to be profitable.
Rolling an option
Rolling an option involves closing one option position and opening another position in the same underlying security. You can roll an option up, down, or out.
Rolling options out to a later expiration date for additional premium extends the trade’s duration and moves the break-even point without allocating additional capital or increasing risk.
Similarly, rolling up or down the unchallenged side of a multi-leg position shifts the break-even point on the position. Rolling widens the price range where a position is profitable and shifts the break-even point closer to the current market price.
When to roll an option
Traders roll positions for multiple reasons. Options sellers roll up, down, or out to collect more premium or extend a trade’s duration. The following discussion primarily focuses on options sellers who might roll a position as part of their portfolio and risk management plan.
Remember, options have expiration dates, so you cannot hold a position forever. Rolling option contracts allows you to maintain exposure to a trade and gives the position an opportunity to work in your favor.
Options traders might:
- Roll out positions to receive more credit, widen or shift the break-even point, and extend the trade’s duration.
- Roll up or down the unchallenged side of an iron condor to adjust the position, taking in additional credit and widening the break-even point
- Roll a call option out and up to lock in profit on the initial trade.
- Roll a put option down and out to lock in profit on the initial trade.
- Roll out a covered call to collect more option premium and lower the cost basis in the stock.
How to roll options
Adjusting a position and taking in more credit reduces the maximum loss without adding additional risk. The credit widens the position's break-even point and increases the range of profitability.
However, rolling can be detrimental to your position and increases the position’s risk. If rolling the position requires a debit, the adjustment adds risk to your losing trade. What does the additional credit or debit mean for your position going forward?
Will the position benefit from extended time? Or, is it better to close the position and take a loss?
Rolling options trades for duration and premium extends the trading timeline and gives the market time to reverse in the position’s direction.
As a general rule, options sellers avoid paying to extend a position’s duration. With any adjustment or rolling trade, the primary goal is to reduce risk. Paying a debit to extend a trade increases risk.
How to roll an iron condor
Iron condors can be rolled out to a future expiration date to maximize the trade’s potential profit. If expiration is approaching and the position is challenged, the original iron condor can be purchased and reopened for a future expiration date to extend the trade’s duration.
If rolling the option brings in more credit, the break-even points extend, and the max loss is reduced. The position’s spread width must remain the same to avoid adding additional risk.
For example, if the original iron condor has a $105 / $110 call spread and a $95 / $90 put spread with a June expiration date and received $2.00 of premium, you could buy-to-close (BTC) the entire iron condor and sell-to-open (STO) a new position in July.
If this results in a $1.00 credit, the maximum profit potential increases and the maximum loss decreases by $100 per contract. The new break-even points are $92 and $108.
How to roll a bull put credit spread
Bull put spreads can be rolled out to a later expiration date to extend the trade’s duration.
Like an iron condor, rolling a bull put spread for a credit reduces risk and extends the break-even point.
To roll a bull put spread, purchase the existing position and sell a new spread with a later expiration date.
For example, if the original bull put spread has a June expiration date and received $1.00 of premium, an investor could buy-to-close (BTC) the entire spread and sell-to-open (STO) a new position with the same strikes in July.
If the roll brings in a $1.00 credit, the maximum profit potential increases by $100 per contract and the maximum loss decreases by $100 per contract.
The bulk of this guide focuses on rolling options selling positions. However, there are certainly times when traders roll long positions.
Rolling long positions is a viable part of many strategies. For example, traders may roll long puts for portfolio insurance or to extend duration on directional trades by rolling out.
Next, we’ll consider rolling long call positions.
How to roll a call option
You can adjust long call options to extend the trade’s duration if the stock price has not increased enough before expiration. Rolling the position gives the trade more time to become profitable, but will come at a cost because more time equates to higher options prices.
If you want to extend a long call position, the option can be rolled out by selling-to-close (STC) the current position and buying-to-open (BTO) an option at a future date. This will likely result in paying a debit and will add cost to the original position.
For example, a $100 call option with a November expiration date could be sold, and a $100 call option could be purchased for a December expiration date. If the original position cost $5.00 and was sold for $2.00, the net loss on the original position is -$300 per contract.
If the December option costs an additional $5.00, the overall debit of the position is now $8.00. Therefore, the max loss increases to -$800 and the break-even point increases to $108.
Although the trade’s duration is extended an additional month, the risk is higher, and the stock now needs to go up even more to realize a profit.
You must evaluate if rolling options is to your benefit, or if it increases risk. Sometimes it is better to take the loss and move on to the next trade.
Time works against challenged positions. Rolling options can be an intelligent way to extend a trade’s timeline to potentially give a losing position an opportunity to become profitable. Not all rolling options are created equal though.
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