Rolling Options: How to Save a Losing Options Trade | Wheel Options Strategies
What’s up team? Welcome back to another video! Today I want to talk about how you can save a losing options trade and even turn it into a winning options trade. This strategy is known as “Rolling”, and there are a variety of ways you can do this. In this video I will dive into my favorite ways to roll options.
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Alright let’s start out with a basic understanding of what rolling an options position means in the eyes of the Wheel Options Strategy.
Rolling an option contract is a form of risk management when trading the wheel where the trader buys back the short contract and sells short another contract at either a different strike, different expiration, or both.
There are three basic varieties of rolling of which any of them can be used by themselves or in combination with another. Those three are Rolling Up, Rolling Down, or Rolling Out.
Let’s start with Rolling Out:
Rolling out is commonly used with both Covered Calls and Cash Secured Puts in order to let price movement play out on a longer time frame. It also allows you to stay in essentially the same position as well as collect a little extra premium on the way. Specifically what rolling out means is: You buy to close your open short contract and sell the same strike price at a later expiration date. By doing this you are extending the trade out longer with the plan of collecting a little extra premium before getting assigned the shares, or after doing some technical analysis you believe the share price will return above your strike price by the time the new expiration date comes around.
Something important to note here is option contracts by nature are worth more the further out the expiration date is because of the increased uncertainty of the future. This is why on expiration day the strike price of a contract will always be worth less than the price of the same strike at a later expiration date.
Let’s take a look at a real example that happened to me recently with Carnival Cruise Lines. On october 8th I sold a cash secured put on CCL at the $14 strike price for $15 expiring one week later on October 16th. Roughly a 1% return on my collateral and an 83% chance that this contract would expire Out of the Money.
SO I THOUGHT.
At the time CCL was trading at just above $15.50 and experiencing a minor selloff. I wouldn’t mind owning shares of CCL but I wasn’t expecting to be assigned this time around. Fast forward a couple days later to expiration day, October 16th. On october 16th CCL was trading below my $14 strike price and I had to make a decision. Did I want to hold my In the money contract through expiration and be assigned shares of CCL? Or did I want to avoid assignment this week and Roll this contract to a later date?
Well I decided Rolling was my best option this week. I didn’t necessarily want to take ownership of 100 shares of CCL just yet. So I bought back my cash secured put for $23 currently suffering a realized loss of $8 since I originally sold for $15. But NOT so fast. I then opened up the options chain to next friday October 23rd, and elected to sell a cash secured put on CCL at the same $14 strike price I did last week but this time I sold for $61 in premium because the contract is still in the money and has time on its side with the extra week. If I take the -$8 from buying back the old contract and add that to the $61 I received for selling next week’s contract, I received a net credit of $53 by choosing to roll out my short put instead of opting to take possession of 100 CCL shares this week.
Now let’s jump ahead to Rolling Up:
Rolling up is commonly used when selling call covered calls on stocks that you have 100 shares of and you prefer not to give up your shares at the strike price of the short call contract you sold. Typically what will happen is you decided to sell a covered call at a certain strike price and something happens with the company whether that be news, earnings, or potentially just short burst of energy and all of the sudden you are sitting here with 100 shares of a stock of which the share price just exploded let’s say 10%, but you don’t get to experience that run up because you sold a covered call below what it is currently trading at.
So this is where Rolling Up comes in handy. Rolling up means you buy back your current covered call for a loss and then sell another covered call at a higher strike price. Typically Rolling Up is paired with Rolling Out. WHere you would choose to roll out and Up in order to capture a higher premium and not have to take a loss on your initial covered call while also making strides to bring your covered call strike price back up above the current market price and getting the covered call to expire out of the money.
This technique can be very helpful if you wish to keep your shares for longer.
Let’s look at a real life example where I used this. On Oct 2nd Dropbox was trading at just over $19 per share. So I sold a covered call at the $20 strike Expiring Oct 9th for $23 and a 75% probability of expiring out of the money. Over the week Dropbox continued to go up and on expiration friday it ran all the way up to $20.20 blowing the top off of my covered call which means I would have to give up my shares at the close of trading.
But since I am not ready to sell my dropbox shares yet I chose to roll that contract up and out. So I bought back my short call for $23 and elected to sell the $20.50 strike expiring the following friday october 16th for $26 in premium.
Now I know what youre thinking. $26? Isn’t that only a $3 credit since you had to buy back the old contract for $23?
While that is true, what I also did was bump up a strike price. Thus I will be able to capitalize on $50 of capital gains (since my cost basis is $20) and $3 of the net credit in premium. For a total of $53 of potential profit by rolling my covered call up strikes and out expirations. But most importantly, it allowed me to keep my dropbox shares because I plan on holding on to them for a lot longer.
And Finally lets talk about Rolling Down
Rolling down is most commonly used to save a cash secured put that has gone in the money. And similarly to “rolling up”, when you roll down… you will likely also pair it up with rolling out.
All three of these strategies are very similar… in that.. the idea of trying to increase your timeline for price movement to play out… while also trying to collect premium by avoiding assignment.
To roll your cash secured put down, you will:
- First Buy back your short put
- Then you will move out to a later expiration date
- And select to sell a lower strike price for either a credit or the same price you bought the old contract for.
What this does is not only allow you to collect premium but it also lowers the amount of collateral you have to put up for the contract
Let’s take a look at a real world example. On monday September 21st Rocket Companies $RKT was trading at about $21.50. Rocket Companies is bringing in high premiums and a worthy candidate for a cash secured put would be the $21 strike expiring the next friday for $30 in premium. But after a few days Rocket companies doesn’t rebound like you had predicted. So when Friday september 25th comes around and rocket companies was trading at $20.50 you had to make a decision to take assignment or roll the position.
Trading at a full strike down from the initial position, I would elect to roll the position out another week and down a strike to $20.50.
This allows me to lower my collateral cost basis by $50 and also still let me capture some additional premium without taking assignment at a $21 cost basis. If the next friday RKT is trading below the strike still i would either take the shares at a price of $20.50 or continue to roll down until the put expires out of the money.
Alright team that’s a quick tutorial on how to use a few different rolling options strategies when trading the wheel strategy. If you don’t know the wheel strategy, I have made three detailed tutorial videos on it and also a variety of other videos that show examples of real trades I made using the wheel strategy.
Thats all I have for you today. Remember to like the video and subscribe to the channel. See ya next time. Peace.
Last Weeks Episode: https://youtu.be/yP7aPwlz8SA
The Wheel: https://youtu.be/_uKo-bO35-Y
Covered Call: https://youtu.be/SrBTqAVtqjo
Cash Secured Put: https://youtu.be/yDpMKDZdJe4
Technical Analysis: https://youtu.be/my5xT9jUmaw
Index Fund Investing: https://youtu.be/kq7pYgTrFYs
