Today’s video investigates how rolling an option position works with a focus on naked puts. Within, we discuss all the variations and when to use each:

• rolling up
• rolling down
• rolling out
• rolling up & out
• rolling down & out

Enjoy!

NOTES

Rolling Naked Puts

XYZ @ $100

Short April 21^st $95 naked put for $1.00 credit

Now, with 13 days to go, it is worth 20 cents. I’ve captured 80 cents (80% of potential profit).

Rolling Definition

Close your existing position (buying to close) and simultaneously open a new position

Why would you roll?

1. You want to maintain exposure to the stock. It could be that this is a SYSTEM.
2. You’ve hit your profit target. You’re dissatisfied with the remaining reward in the current position and want to adjust to a NEW, higher potential REWARD trade.
3. The stock is going against you, and you no longer like the PROBABILITY of the current trade. You roll to a new option with a better PROBABILITY.

Rolling up (in strike price) OFFENSIVE

Motivation: Get more reward

You might do this if there’s still a lot of time (3+ weeks) in the current month and you want to double dip in that same month.

EX: Buy to close April 21^st $95 naked put for 20 cents debit. Sell to open April 21^st $100 naked put for $1.00 credit. NET CREDIT: 80 cents (additional profit potential)

Rolling down (in strike price) DEFENSIVE

Motivation: Improve your probability of profit

You might do this if there’s still a lot of time (3+ weeks) in the current month, but you want to move further OTM to a lower delta to improve your probability.

EX: Buy to close April 21^st $95 naked put for $1.50 debit. Sell to open April 21^st $92.50 naked put for $1.00 credit. NET DEBIT: 50 cents (subtracts from profit potential).

Rolling out (in time) NEUTRAL

Motivation: I’m running out of time in the current trade. Extend trade duration.

You might do this if expiration is approaching and you’re comfortable with remaining at the same strike price.

EX: Buy to close April 21^st $95 naked put for 20 cents debit. Sell to open May $95 naked put for $1.00 credit. NET CREDIT: 80 cents (additional profit potential)

Rolling up & out OFFENSIVE

Motivation: I’m nearing profit target and/or expiration for current month & want to increase profit potential and re-up the trade for another month.

EX: Buy to close April 21^st $95 naked put for 20 cents debit. Sell to open May $100 naked put for $1.50 credit. NET CREDIT: $1.30 (additional profit potential).

Rolling down & out DEFENSIVE

Motivation: I want to lower the delta (improve probability of profit) while extending trade duration.

You might do this if we’re approaching expiration and/or if the stock has fallen to your put strike and it moves ITM and you want more room. Sometimes you can roll for a credit, but if you move too far OTM it will cost a debit to roll.

EX: Buy to close April 21^st $95 naked put for $2.00 debit. Sell to open May $90 naked put for $1.75 credit. NET DEBIT: 25 cents (improved probability of profit)

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