What do you do if you’re in a trade that’s not moving (and it’s one you want to move) and you’re coming up on expiration? What do you do if you’re in a directional trade and it’s moving but in the wrong direction? And better yet what do you do if you’re in a trade that is going your way but you think it’s going to keep going your way?
In all these cases, it you still believe your trade is going to go your way, you can roll your trade over. You can learn exactly how to do this by reading the following article by Victoria Duff of Demand Media. Check it out and let me know what you think by leaving a comment below.
Options trade on the CBOE.Scott Olson/Getty Images News/Getty ImagesOptions are contracts to buy or sell a share of stock or a futures contract. A put option entitles the owner to sell a specified security at a specified price until the option expires. A call entitles the owner to buy a specified security at the call price until the option expires. They can be used to hedge your long or short positions against unforeseen market movement. They are also inexpensive ways to trade the markets, but since they have specified expiration dates, traders are often forced to buy more time by rolling forward their options positions.
Step 1
List your options positions according to your original intent in either buying or writing them. If your intent was to hedge portfolio positions, it is likely that you will want to roll and adjust your hedges. If your intent was to use the options as trading vehicles, re-evaluate your original trading strategy in light of market conditions, then decide whether you wish to maintain your put or call positions.
Step 2
Pay attention to the expiration dates of your option contracts. If you intend to roll them forward, remember that their value decreases rapidly as the expiration date nears. Use an options calculator to figure how much time value is part of the contract price and roll your position before the time value begins to drop significantly. This provides some money to use toward replacing the front month contract with a back month contract.
Step 3
Roll options you own by selling the front month and buying the back month. This means you sell the option that is about to expire, using the proceeds of the sale to purchase an option that has more time till expiration.
Step 4
Roll options you have written by purchasing the expiring options, or front month, and selling or writing option contracts with a longer time to expiration.
Tips & Warnings
- A put option is written or created by someone who is willing to buy the stock (or futures contract) at the strike price and usually doesn’t think the stock or future will trade low enough to make sense selling it at the strike price. Writing an option also earns the writer additional revenue by selling the put. Generally, the writer of the call is a person who actually owns the stock, wants to earn extra money on the position and doesn’t think the stock is likely to trade high enough in the open market to have the stock called away.
