Ultimate Guide to Rolling Options: 3 Methods to Transform Your Trading Game!

Ultimate Guide to Rolling Options: 3 Methods to Transform Your Trading Game

Hey Tribe!

There are many reasons why I like options as an investing instrument. One of the key ones is that we can adjust our trades. Every options trading scenario is different. Sometimes you'll buy a call option, nail the directional move 100%, and exit the strategy a big winner upon expiration. Sometimes, however, your position might need some fine-tuning to achieve its maximum potential. Here, we'll discuss different methods for rolling options, whether you're looking to adjust your position out, up, or down, with detailed stock examples.

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Rolling Out

"Rolling out" means replacing an expiring option position with an identical trade in a later options series. For example, you might sell to close a January 50 call and simultaneously buy to open a March 50 call.

Example with Apple (AAPL) Covered Calls: You hold 100 shares of AAPL, currently trading at $180, and have sold a January 185 covered call. As expiration nears, AAPL is trading at $190. You decide to roll out and up the position by buying to close the January 185 call and selling to open an April 195 call. This way, you extend the expiration date and increase the strike price, allowing for more upside potential while continuing to generate premium income.

Two scenarios where rolling out makes sense:

1. Profitable Position: You've pinpointed a winning options strategy and feel confident the directional move will continue to play out in your favor.

   • Example: AAPL has moved from $175 to $190. You take profits on the January 185 call and initiate the April 195 call, positioning yourself for continued gains.

2. More Time Needed: You still believe in your original prediction, but more time is necessary for the trade to play out.

   • Example: AAPL has moved from $175 to $180, but you think it needs more time to reach $200. Rolling out to April gives the stock more time to meet your expectations.

Rolling Up

"Rolling up" indicates swapping out lower-strike options for contracts with a higher strike price. If you've played a call option and the stock makes a quick, dramatic move in your favor, rolling up raises the bullish stakes: you sell to close your existing call option at a profit and buy to open a higher-strike call for (ideally) a smaller amount of capital.

Example with Tesla (TSLA): You hold a TSLA 200 call option, and the stock price jumps from $200 to $250. You sell to close your TSLA 200 call for a profit and buy to open a TSLA 250 call, locking in gains while maintaining a position to benefit from further upside.

Rolling Down

"Rolling down" involves the closeout of a higher-strike option in exchange for a lower-strike option. You may choose to roll down if you've purchased put options that returned significant gains in your favor shortly after they were initiated.

Example with Netflix (NFLX): You hold a NFLX 400 put option, and the stock drops from $400 to $350. You sell to close the NFLX 400 put for a profit and buy to open a NFLX 350 put, positioning yourself for further downside.

Rolling down for short options: If you’ve written a covered call on Netflix with a 400 strike, and the stock drops to $350, you can roll down to a 350 strike to avoid assignment and potentially generate additional premium.

Combining Rolling Strategies

Any of the above tactics for rolling options can be combined to suit your needs. For example, if you'd like to extend a winning call trade, you might choose to roll the option up and out, selecting both a higher strike and a longer-dated series.

Example with Amazon (AMZN): You hold a profitable AMZN 150 call option that is expiring in a month. The stock has risen to $180, and you believe it will continue to rise. You decide to roll the option up and out by selling to close the AMZN 150 call and buying to open a AMZN 180 call expiring three months later. This strategy locks in some gains while allowing for continued participation in the stock's upward movement.

One Final Note

As indicated above, be sure that you're not rolling options to forestall an inevitable loss. If a trade is moving firmly against you, it's often best to close out the position and take your lumps. Otherwise, you run the risk of racking up additional transaction fees—and potentially greater losses.

4oEvery options trading scenario is different. Sometimes you'll buy a call option, nail the directional move 100%, and exit the strategy a big winner upon expiration. Sometimes, however, your position might need some fine-tuning to achieve its maximum potential. Here, we'll discuss different methods for rolling options, whether you're looking to adjust your position out, up, or down, with detailed stock examples.

Have a great weekend

Sean