What Is Rolling an Option?

How to guide to managing an options trade by Rolling the Option

Learn how to use covered calls to reduce the price of buying a call or to hedge for the downside potential of your existing stocks.

Options Management Strategies
Rolling an Option

Learn how to manage an options trade by rolling

Roll the strike

Roll the expiration

Collect credit

 

Learn How To Adjust Bull Call ( Debit ) Spread
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The purpose of rolling a trade is obviously to profit from a directional assumption that led you to write the option trade in the first place.  That is, if you felt that stock xyz was going to go up, you would create a bullish option trade that would create for you a profit.  

The problem is, stocks in general don’t move in straight lines.  The stock may actually move against you before moving in your direction for various reasons.  Sometimes, you feel that the initial directional assumption was correct; but you just need more time.  

You will want to roll an option basically to avoid a loss on a trade if you continue to feel that the initial assumptions are still correct.

The 3 factors to consider when thinking about rolling an option are:

  1. Do you still feel that your initial directional assumption is still correct?

  2. Can you roll the trade for a credit?

  3. Could you find a better trade in which to use your capital instead of rolling the trade?

Buying a Call

What is the difference between a put and call credit spreads?

  • The maximum profit for credit spreads ( bull and call ) is the premium collected
  • The maximum loss for credit spreads ( bull and call ) is the width of the strikes
  • Iron condors are created by combining a bull put credit spread and a bear call credit spread
  • Both are defined risk strategies

Bull Put Credit Spreads – 

  • Set up by selling a short put at a higher strike price while buying a long put at a lower strike price
  • The width of the strikes will define your risk
  • The premium collected is your maximum profit
  • You will profit as long as the price of the stock is greater than the short strike plus your premium collected. 

Bear Call Debit Spreads – 

  • Set up by selling a short call at a lower strike price while buying a long call at a higher strike price
  • The width of the strikes will define your risk
  • The premium collected is your maximum profit
  • You will profit as long as the price of the stock is less than the short strike minus your premium collected. 

Iron Condor – 

  • Notice that when you combine a bull put spread and a bear call spread, you get the pay-off diagram for an iron condor.

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