HOW TO ROLL AN OPTION
A common question I receive is how to “roll” an option. Basically, rolling an option simply means that you are exiting one contract while simultaneously entering into a new one. In fact, the software platform ThinkOrSwim allows you to do this very simply by right-clicking on an option position and choosing “Create Rolling Order”. More often than not, rolling an option is used to reposition a position that might be going against you, into a new position that adjusts itself either in price, time to expiration, or both.
Let’s start with an example of a stock that you might want to own for a certain price. WMT, for example, is trading right around 73.30 at the time of me writing this. If I believe in Walmart’s business model, and I would like to potentially own this stock in my portfolio for a cheaper price than it is currently trading, I could go out and sell the Sept. $60 puts for around .50 per contract (which would be $50 per contract in actual dollars). If WMT holds above the $60 line by Sept expiration, I get to keep the $50 per contract in my account. If it starts to fall however, we want to have a clear plan on how to roll down, so we want to watch the *price* of the option we sold very carefully. This means that if the price of the contract increases 50% (which would mean the stock is dropping and our position is going against us) then I would close out (buy back) the option for .75, and go sell another put maybe out in Jan (the next option series) for whatever strike is lower than the $60 strike and that pays me the .75 cents I lost.
Here’s an example for rolling a Call option: If a breakout occurs on a stock trading at $50 and the stock moves up to $55, perhaps you could sell the $60 call option and wait for the pullback. If you sold this option for $1.00, and the stock continues higher (which would increase your call option to maybe $2.00), you would then close out the position and sell another call with a higher strike price and maybe longer out in time for the $2.00 you have lost on the previous option.
So to recap, you are simply “selling” your losses into a new position; i.e., if you lose $1.00, then go and sell another option for that $1.00 you have lost.
These are simple examples of how you can “roll” an option when you get in trouble.
Please practice this with a paper-trading account for at least 3 months, and ask me questions along the way before you ever think about doing these trades on your live account, because they can be VERY RISKY until you know what you are doing