Author: Chris Hood
Be sure to check out new episodes of my video podcast each week, where my ace pupil Brian Jones and I talk the ins and outs of options trading- and give you insights and strategy that you can immediately put to work for you in the markets.
Let’s assume that you have a bull put spread that’s expiring next week, and it doesn’t look promising.
The stock price took a turn against your position – your spread is starting to go underwater. It looks like it’s going to expire out of the money and lead to a complete loss.
What do you do?
Consider what you had planned for the trade.
Did you expect to hold it until it expired, no matter what?
Then that’s what you should do. Once you make a plan, never deviate from it without good reason.
However, you might consider rolling the trade out to a further expiration to give you more time to be correct.
Instead of closing the trade and taking the loss, you may be able to turn the spread into a winner.
Here’s how a rolling order works.
You sell the current position, then buy another spread to replace it. How far out you push your expiration and what strikes you select are up to you.
Personally, my plan is to avoid rolling trades.
I can’t say that I never do it, but I’d far rather just cut my losses and move on to another opportunity so I can win back the money I lost.
Plus, it’s just a management tool that hasn’t given me great results in the past.
However, many traders do roll. So I want to give you a few tips to help you use this strategy if you prefer.
First, never pay to roll a trade.
If you decide to push your expirations out in time, make sure you do so for a credit.
When you buy back a spread at a cheaper price than the new one you sell, you receive the difference in this premium.
Check the various expirations available at your current strikes.
Find the one that puts more money in your pocket.
If you can’t roll for a credit, it’s best to just close the trade.
Next, whenever, possible don’t just roll the trade out in time but move the strike prices down. This gives you a better chance of winning.
This won’t always be possible, but occasionally due to the effects of volatility, it just might work out.
If you can’t roll your strikes down for credit, then just keep them where they are.
Having to maintain the same spread isn’t necessarily a reason to kill the position now. But keeping the same strikes on a falling stock is usually much riskier.
Finally, never roll a trade just to prevent taking a loss.
Before you take a position in the market, you must have a thesis on the movement of the underlying stock.
Is it going up, down, or staying range-bound?
What does your chart analysis tell you?
You’ll never be correct all the time. Trading is based on probabilities, and some of your trades will lose.
If your initial assumption is wrong, then take the time to re-evaluate the stock. Then, consider the roll as an entirely new trade.
Never make your decision based on FEAR of taking the loss and the HOPE that trade will recover.
What do your indicators, the chart, and the market tell you about where the price is heading?
If you can’t defend your decision to roll the trade with technical data, you’re relying entirely on luck.
Luck is a poor trading strategy.
A word to the wise would be to revisit your exit criteria and get out of losers earlier rather than scrambling to manage them at the last minute.
As the saying goes, “An ounce of prevention is worth a pound of cure.”
If you’re going to put rolling trades into your management plan, design the rules in advance.
Relying on in-the-moment decisions means emotional trading, and emotional trading leads to financial ruin.
Analyze, plan, and execute.
Know what you’ll do before the situations arise.
Do your thinking when the market is closed, and watch your profits run.
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