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Online Trading Options Strategies - Rolling
By Bret Fogle
Rolling
is defined in options online trading as moving a position
from one strike to another either vertically in the same month,
horizontally to another month or some combination thereof.
Other
times, you may have to buy your short call back so that you
will not lose your stock. Sometimes, you may even want to
allow the stock to be called away if you have decided that
the stock has reached a level were you want to take your profits
and begin to look for another opportunity.
The term
roll means to move your position either out to the next strike
or to move your position up or down a strike in the same month.
The term roll means to move.
Rolling
is normally done via time spread and/or vertical spreads.
Without getting into the trading of spreads, which is a unique
strategy in itself and a topic for future Options University
courses, we will talk a little about the roll.
As stated
before, the covered call strategy is most effective when executed
month in and month out over an extended period of time.
In order
to do this, an online trading investor must re-initiate the
position every month at the option’s expiration. The
re-initiation of the position every month is where the term
rolling comes from. However, there may be times when you may
want to give yourself a little more upside room for capital
appreciation. In those rare cases, you will not want to roll
the position, because it might be called away if the call
you sold is exercised when it becomes in the money.
When an
option’s expiration approaches, your short option can
either be in-the-money or out-of-the-money. As we discuss
the two potential outcomes, let’s first assume that we
want to hold onto our stock.
If the
option is going to finish out of the money, you would let
it expire worthless and then sell the next month’s call.
If the option is going to expire in-the-money and you want
to keep the stock you will need to buy the short option back
and sell the next month’s call.
This trade
will consist of two online trading options. You will be buying
one option and selling another, which is commonly known as
a spread and is referred to as a single trade.
So, when
you roll out your covered call or buy-write, you do it by
doing a spread. The front month option, the one that you happen
to be short, will be bought back thus ensuring you keep your
stock.
The second
month option will be sold short thus re-initiating your covered
call strategy. The position that remains is long stock and
short calls. As far as the selection process of the spread
used for the rolling of the position, there will be some choices.
Of course,
there is no choice as to the front month option, you must
buy back the option you are short. However, you do have a
choice as to the next month option you are going to sell,
whether it be near term or farther out in expiration.
This goes
back to our earlier conversation about lean. If you are no
longer bullish then you would not have bought back your short
call and instead allowed it to be exercised and have the stock
called away from you. If you choose to roll the position then
you must be somewhat bullish on the online trading stock.
Your lean will dictate to you which new option to sell.
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