This is How Options Traders Roll
Jul 3, 2023
At tastylive, we try to systematize the trading process. That means we have a set of mechanics we follow at trade entry and trade exit. Furthermore, during the life of the trade, we look for opportunities to increase our probabilities, widen our break-even points and reduce our risk.
This is where “rolling” (the process of adjusting your strikes on a position in some way) plays a big role, and to understand how to roll your positions, you first need to understand the most common rolling terminology.
Rolling “out” is arguably the most common type of roll. It simply refers to moving the position from the current expiration cycle to some later expiration cycle. So, in effect, rolling out is nothing more than adding time to the trade. The added time could be days, weeks, months, or even longer, but rolling out is always adding time. Sometimes, you might also hear rolling out referred to as “rolling forward.”
Next, you want to familiarize yourself with rolling “up” and rolling “down”, which refer to moving the strike price (or prices) of your option position. Simply put, rolling up is moving up the option chain to some higher strike price, and rolling down is moving down the option chain to some lower strike price. It doesn’t matter if you’re looking at calls or puts. If you move a 100 strike to 105, that’s rolling up, and if you move a 100 strike to 95, that’s rolling down—pretty simple and straightforward.
Lastly, you have rolling “in,” which at first glance might appear to be the opposite of rolling “out,” but it is not. If it were, then rolling in would refer to reducing the time in a trade by moving from a farther-out expiration cycle to a nearer-term expiration cycle, but that is not something we consider with our adjustments.
Instead, rolling in refers to moving the strike price closer to the current stock price. Again, calls or puts, it doesn’t matter. So, if a stock is trading at 50, and you roll your 40 strike to 45, that would be rolling it “in” (and also rolling up), or with that same stock trading at 50, if you roll your 60 strike to 55, that would also be rolling “in” (but this would be rolling down). Essentially with rolling in, you’re bringing the strike price closer to the action of where the stock currently is in both situations.
Jim Schultz, a quantitative expert and finance Ph.D., has been trading the markets for nearly two decades. Jim hosts From Theory to Practice, Monday-Friday on tastylive, where he explains theoretical trading concepts and provides a practical application of those concepts to a trading portfolio. @jschultzf3
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