To The Moon

If you are not familiar with options, I would suggest reading my first 7 posts:

Part 1 - Introduction to options

Part 2 - Selling Put options

Part 3 - Buying Put options

Part 4 - Selling Call options

Part 5 - Buying Call options

Part 6 - Common Issues faced when selling or buying options

Part 7 - LEAPS

What is rolling options?

You might have come across people mentioning that they are rolling options. If you google it, there are many definitions out there with many names to it. You can roll any option (BUY or SELL PUTs and CALLs). Rolling options is only applicable to options of the same stock. It is NOT considered rolling options if you open and close an option in Apple, then go to open another position in Microsoft.

In simple terms, there are 3 moves you can make when rolling options:

1) Move an option from one strike price to the next with the same expiry date.

2) Move an option from one expiry date to the next with the same strike price.

3) Move an option from one expiry date to the next with a different strike price.

Why do you want to roll options?

The main reason is that the trader/investor does not have intention of holding the underlying stock at that price. Another reason is that the option is expiring and the trader/investor wants to continue the trade and use it to extend the expiry date.

When and how do you execute a roll option to move from one strike price to the next with the same expiry date (Move 1)?

Let's use an example. If you BUY a CALL option for Apple with a strike price of $150 when the price was $125 on Jun 2021 that is expiring on Jun 2022 and paid a premium of $6.20 per share. You feel that it will go up higher, but you want to lock in the profits first in case the market corrects. What you can do is to close the current position (SELL CALL) and establish the same position again (BUY CALL) with a strike price of $200. You will then take profit of the CALL option premium when you close the position (SELL CALL), which is $24 per share and establish another position (BUY CALL with premium of $4.35 per share), thus locking in the profit of ($24 - $6.2 - $4.35 = $13.45 per share) and continuing the trade. However, there is a penalty of paying commission for every trade, so in this case, you will have to pay commission for closing the position and establishing a new one and also suffer time decay, so this method is not commonly used.

This is also applicable to BUY PUT options if the company is bearish.

Typically, there is no need to do this for SELL PUT or SELL CALL as the premium is already paid up front. The seller would just wait for it to expire. However, if the option is ITM, then it is a different consideration (See move 2 and move 3).

When and how do you execute a roll option to move from one expiry date to the next with the same strike price or different strike price (Move 2 and 3)?

This is a more commonly used strategy for both taking profit and trying to recover from a trade that is not going in the direction you want. For taking profit, it will be as described for Move 1, but instead, the expiry date will extended to allow more time for the trade to go in the direction you want.

For recovering from a SELL PUT trade, using an example, lets say you SELL a PUT option for BABA with a strike price of $130 on 18 Jun 2021 that is expiring on 17 Dec 2021 and receive a premium of $1.35 per share. However, the current price is $125 per share, so the option is ITM and the premium to close the PUT option with a strike price of $130 is $8.3 per share. In order to roll the option over so as not to hold the shares and not suffer any loss, you will need to look for an option with a premium of ($8.3-$1.35 = $6.95) or more per share with an expiry date that is longer than 17 Dec 2021. One possibility is the PUT option with a strike price of $125 expiring on 7 Jan 2022 with a premium of $7.2 per share.

So what you can do is to close the current position (BUY PUT) and pay a premium of $8.3 per share, then open a new position by SELLing PUT the option expiring on 7 Jan 2022 with strike price of $125 to get back a premium of $7.2 per share. This will be higher than the break-even price of $6.95 per share. Note that this is only feasible if the strike price of the option is near the share price. If your option is deep ITM, it may not be possible to find another option that has enough premium to cover your losses or you may have to resort to LEAPS options stretching out to more than 1 year to cover your losses. In such situations, it might be easier to just cut your losses by closing the option OR to allow the option to be exercised and hold the stocks to do SELL CALL later.

In the case of recovering from a SELL CALL trade, it will be the exact opposite of a SELL PUT. However, do remember that for SELL CALL, you will typically already make some profit from the trade as you will select a strike price higher than your entry price. In this case, for stocks that go to the moon, you might also end up deep ITM and will be difficult to find another option with enough premium to cover your losses. In such situations, it might be easier to just let the SELL CALL exercise and let the stock go, capping your profit instead of suffering a loss.

In Demystifying Options part 9, I will explain time decay in options as it is too big to combine with this post...

Always remember.. If you do not understand what is happening, do not blindly follow and execute the trade!