Rolling Options

While we won’t do it often, rolling options can be a helpful strategy to use when we are up against expiration and need more time for the trade’s catalysts to play out. By rolling the initial option into a later expiration, we buy some time to either turn our position around or at least limit losses.

Whenever an option takes a hit, I always take a step back and reevaluate. To help me make my decision of whether to sell or continue holding, there are several factors that I consider. I’ll look to see if there’s news to account for the action, if the news is related to the company or the broader market, if the action is on strong volume, how close we are to expiration, and if the stock had violated a support or resistance level. Depending on what I find, we’ll either hold on for the upside or close out of the trade and move on to better opportunities.

A good example of this is our recent roll with Facebook (FB). The stock had soared after earnings, and was a good candidate for calls on a pullback. While we were able to open a position, the stock fell amid the broader market weakness the very next trading day, bringing our calls right to our 30%-35% stop-loss range at the open. But given the fact that FB’s earnings were the strongest out of every industry, I felt that the weakness was simply due to investors selling anything to reduce exposure. I didn’t think it would take much to get the stock moving in the right direction again, so I felt the best move was to roll our position into a lower strike and go another week out in expiration.

There are two steps to the process: selling the initial calls and then buying the newer ones with the later expiration date. Many brokers will let you do this in one transaction, which will save you a little bit on commissions. If your broker does not let you sell and buy in one transaction, that’s okay. You can still conduct the trade in separate transactions by selling your current calls and buying the ones with the lower strike price. I recommend contacting your broker if you have any questions on the correct procedure to execute a roll so that you’re all set for the next one.

And remember, when you roll a position, you are not adding more capital to the second position (that would essentially be doubling down, which I do not recommend doing in options trading). Instead, you’re simply rolling your remaining capital from the first position into the second.

Please know that if I recommend rolling a position and you did not open the initial trade, that’s okay, too. You can still buy to open the second position that we’re rolling into.

I hope this helps explain our rolling strategy a bit more! As always, I recommend contacting your broker directly if you have any questions on the correct procedure to execute a roll so that you’re all set for the next one.

Sincerely,

Editor, High Octane Trader