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From trading basics to advanced strategies and high-probability set-ups, the insights you need from our all-star lineup of trading pros is delivered straight to your inbox. The stock market offers virtually any combination of long-term opportunities for growth and income, as well as short-term investments for trading gains. Michael Thomsett. Among these are the following four every covered call writer needs to remember: Rolling keeps you exposed longer, tying up capital. As advantageous as it might look to roll forward, does it really make sense?
When you roll, you buy to close the original position and replace it with a sell to open, later-expiring new position. But this means you keep yourself exposed to exercise risk and tied up on margin for the extended period of time. The question becomes: Does rolling make sense? Sometimes it does and sometimes it does not.
Unless you roll to the same or a higher strike, you could end up losing. Some traders, intent on avoiding exercise, roll to a lower strike.
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This is a big mistake. The lower strike means you get a lower capital gain when the call is exercised. So you have to hope for a decline in the stock's value in order for the call to work. A rollout consists of purchasing an option with a further time until expiration. This simply means that a traders view of the markets did not materialize before the expiration date. A Roll Up or Roll Down consists of purchasing an option that is further higher or lower than the current strike price.
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This would only need to be done if a traders viewpoint has not changed on the stock and needs to avoid their trade going in-the-money due to assignment risks associated with short positions. Suppose a trader is short a call option that has gone deep in-the-money. In order to avoid the risk of going short, they would Roll Up their trade. The strike the trader is short is the 17 APR 20 calls.
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Here is an example of how a trader would roll out a short call trade. Source: Thinkorswim. This trade would allow a trader to remain in a similar position but would remove the risk of early assignment on the trade by selling calls that are further out-of-the-money that do not have any risk of assignment.
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Suppose a trader is short a put option that has gone deep in-the-money and they want to avoid assignment risk on their position. They would want to Roll Down their strike price in order to get their trade back out-of-the-money and get more room on their trade.
Here is an example of how a trader would Roll Down their trade:. Rolling a spread strategy is similar in concept to rolling a short call or short put option, but instead involves 4 legs instead of 2. Since the spread consists of two contracts instead of just one, rolling a spread allows a trader to have many more possibilities. When a trader rolls down, they are lowering the strike price involved. Say they are short upside calls and the stock price drops. In the first example, we correctly played the move on ABC. If we were to believe the trend would continue in our favor, rolling up and out would make sense.
Say shares of XYZ are deeply oversold.
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The valuation is wildly low and the technicals are screaming for a bounce. Expiration is in 32 days. However, after 30 days go by, XYZ has not bounced the way we thought it would. The fundamentals are still good and the technicals remain oversold. In other words, our thesis has not changed and we are still comfortable owning the underlying security.
However, we would prefer not to if possible, as our preference is to collect the premium from the short put sale. What options do we have left?