Why is rolling trades essential

Gerelateerde afbeelding

We are rolling a trade to take profits or when the market is moving against your position. Rolling a trade is one way to manage a winning or losing position. What does it mean to roll a trade. It is simultaneously closing our existing position and open a new one. You may want to change the strike, duration, or both. I learned from tastytrade, to look at rolling as a defensive tactic and roll for duration to “keep the dream alive”. We will only roll if our assumption is still the same. If my assumption has changed, I rather close our position. When it is a defined risk spread I leave it open and let the probabilities play out.

 

When are you rolling trades

Knowing when to roll a trade can be subjective, but we look at a few different aspects of the trade to help us decide.

If our probability of profit is less than 33% or if the trade has gone past one to two times our profit target, we will look to roll for duration.

We do not double our risk by doubling our contracts, we simply roll for duration and collect a small credit. We like to roll for a credit because it adds to our original profit potential and extends our breakeven price.

In most cases, we do not roll defined risk trades. When we enter the trade we are comfortable with the max loss that can occur and allow the probabilities to play out.

However, if we are in a trade and our short strike is slightly ITM or ATM and our long strike is OTM, we may roll for duration. Our studies show that if our assumption is the same and the underlying is cyclical, we can roll perpetually until we are right and turn a profit consistently.

Rolling guidelines

Here a few rules for adjusting your option trades

  • Roll the untested side
  • Roll for a credit
  • Roll closer to the stock price or roll out for more duration

In the video below Tastytrade bought strangles. Watch the episode of Rolling Strangles – When, Where, How

 
Jan 11, 2016 A scenario of rolling down the untested side down in XYZ stock was displayed. On January 7th our $196 strike was tested so we rolled down …

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