One of the most common questions we are asked is what to do when one side of a strangle is tested. Traditional financial education will tell you to adjust the tested strike of the trade. We wanted to put that logic to the test. Today, Tom Sosnoff and Tony Battista take a look at four different rolling strategies that can be used to defend a tested position. First, the guys look at three different strategies for rolling the tested side: rolling the tested side away from the current price, back to the original probability of expiring out of the money; rolling the tested side to a later expiration cycle at the same strike to extend duration and look for a reversion in the underlyings price; rolling the tested out to a later expiration cycle and away from the current price to our original probability give ourselves more room and time to be right. They compare this to rolling the untested side closer to the current price in the same expiration so that we can collect a larger amount of credit and expend our break even points. The guys also looked at the results of what would happen if you didn't adjust the trade at all. After everything was all said and done, rolling the untested side back to the original probability proved to be the best strategy and something that the guys have always believed in!
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