Lesson Overview

Rolling Positions

Rolling strategies from one month to the next is an effective way to increase trading timeline or duration, giving yourself more time to be right and letting the probabilities work.

In this video we'll give you a couple examples of how rolling a strategy to the next month could be beneficial in keeping a trade alive and finally turning a profit. Moreover, we'll present our guidelines of things you want to make sure to check before you roll the position to the next month.

It's important to realize that rolling is not always beneficial and taking a loss on a trade sometimes can be the best choice as opposed to rolling only to find yourself with an even bigger loss.

More Discussion

Was This Helpful? Add Comments/Questions

  • STEVEN SMASON

    Hi Kirk.
    I think I understand the basics of rolling out to the next month, but can you give a brief explanation as to what would be the reason to do so … extend winning trade, extend losing trade, etc.
    Thank you

    • Hey Steven! We would only extend the timeline (roll) if we can either take in a net credit (reduce risk) or for the same price/value extend the timeline to give ourselves more time to be right. If we have to pay to roll it’s never worth it because you guarantee a loss.

  • I think you’re spot on James – you take a bigger credit for the roll BUT the rate of decay is much slower so the higher credit will take longer to “come in”

Show Video Transcript +

In this video tutorial, we’re going to talk about the mechanics and logistics of rolling option trades. When you go through a roll, you're basically taking one contract from one month to the next contract month.

Let’s first look at it with an example that we have right now which we can use from our broker platform. Alright, we’re inside our platform here on Thinkorswim and we’re just going to look at this trade that we currently have, this call spread in XRT.

We entered this trade today, but just for some reason, if I wanted to roll this position to next month and extend the trading timeline, all we would have to do is just come in here and click on this little blue dot here next to the trade and you can see, I can go down to “create rolling order.”

The first thing I want to do is I just want to roll the whole contract. It’s this first one here that’s listed, this February 15, the February, the 97/98, 97/98. That’s basically saying we’re just replacing the current contract with a new contract out in the next month.

When I hit “select this position,” you can see down below that what it does is it automatically defaults to the next available month.

This is where I think people get a little bit confused, is that the system will automatically default to that next available month which in this case, the next available month beyond our contracts that we have right here, the February month which is the monthly contracts, the next available strike period or contracts is the weeklies.

It’s going to default to that next one which is FEB4 and you can see it’s right here, it’s FEB4 15. It’s hard to read, I know with the red, but it’s FEB4. What we want to do is we want to just make sure that we’re rolling this to the next month.

All we have to do is click here and go down to the March contracts. You can see now what we’re doing here logistically is we are 100% closing out of our February position which is this part of the order, so we’re buying back on two short 97 calls, we’re selling back our two long 98 calls and then we are exactly replicating that current position that we have out in March.

That’s the logistics of a roll. You’re basically closing out the position that you have here in February. We’re going to close this position and reverse it, pay that cost to do that, whatever that cost is and then resell a position out in March at the same strikes, the same number of strikes, the same width of strikes, everything.

Notice that the same quantity is all in here, the same strike selection is all in here, the same type is all in here. We’re not doing anything different other than just changing the contract month that we’re working with.

And you can see the difference between buying back our February options and selling out the March options is an $.8 credit right now. In this case, it meets some of the requirements that we have for rolling a contract to the next month.

We’re going to talk about those here towards the end of this video tutorial, but in this case, rolling it out to March meets that requirement of taking in some sort of credit to extend the trading timeline. Now as part of this trade, we no longer have 36 days, we now have about 64 days.

Alright, now that we're back here, I just wanted to cover a couple of things that we need to consider before rolling. These are really things that you can use as maybe like a checklist for rolling trades or even just things that you mentally ask yourself and questions you ask before making a roll because you don’t need to roll every position.

I think people when they get started with rolling options and learn about it, they feel like they can roll every position, but it’s not meant for every single setup. One of the things you can ask yourself first is, “Do you have the same stock assumption?”

Meaning if you are originally bullish on a trade, are you still bullish on that trade? Do you still think the stock is going to go higher?

If you're not, now you think the stock is going to go lower, why would you continue to roll a position from one month to the next that has the same underlying fundamentals of making money if the stock goes higher? That’s the first thing you should ask yourself.

The second thing is you got to ask what’s the trade off. “Am I getting a credit? Am I receiving money?” Like the example we just went through. “Am I receiving money to take on additional time or am I paying to roll?”

We are fans of if you’re going to roll the contract, especially short premium contracts, you generally got to get paid some money or take a credit on the roll because you’re extending the trade, you’re extending the timeline, but you’re also increasing your risk potentially if the trade goes really far in one direction or another the next month.

We generally feel like you should take in at least a credit to do this or if nothing else, a very small debit. If you end up seeing a trade where you go through the mechanics of rolling like we just went through and you’re actually paying money to roll to the next month, it's probably not worth making the trade.

You are probably better off to close out the trade and take the loss, reestablish a new set of strike prices that reset the probabilities for you.

In a case of if you have a call spread above the market and the market is moving towards you, maybe it might be a good idea to close out that call spread and reset for the next month some strikes higher that reset the probabilities for you.

And then the third thing that we always want to ask with rolling contracts is, “Is there a better use of our capital elsewhere?” This really comes down to an overall understanding of your portfolio.

And really, is this the best trading opportunity that there is because we’ve been in situations sometimes where we can roll for a credit and we’ve still got the same stock assumption, so one and two are fine, we can roll for a credit, still think that we’re bullish or bearish on the stock, but we need to use that capital on a better trade.

There's just something that's better out there and oftentimes, I find that that’s actually the case, is that when you look through a bunch of different scenarios that are out there, sometimes there’s just a better use of your capital someplace else than continuing to tie it up in this trade.

And honestly on the flipside of that, other times, this maybe the best use of your capital just staying in this trade even if it's for a small win or a small return, but there might not be enough out there, there might not be enough volatility in the market to really justify moving to something else.

You may be in the best trade that you could be in. But just asking that question just gets you thinking a lot more logically and streamlined about how to make these types of trades.

As always, if you have any questions or comments on rolling trades, feel free to add them in the comment section right below this video lesson. Until next time, happy trading!

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