Today’s video explores best practices for rolling naked puts. It answers the following questions:

1. What is rolling?
2. When should you do it?
3. How do you build the order?
4. Does it matter if you roll for a credit or debit?

Enjoy!

Notes

Rolling for Credits or Debits

Naked Puts

Rolling = closing the old position and simultaneously opening a new position

Why?

1. You want to maintain exposure.
2. You’ve hit your target and want to re-up the profit potential.
   1. Sell a put for $1.00, now it’s worth 10 cents.
   1. 100% of the time, you are rolling for a CREDIT.
3. You’re losing and you want to reduce risk and/or increase probability of profit.

Which new put do I sell?

1. I hit target on existing naked put. Sell a new one using your rules.
   1. Rolling order: Buy back Feb $50 naked put for 5 cents, sell March $50 naked put for 60 cents.
2. My old naked put is losing and I want to adjust the position to a) increase my probability of profit and/or b) reduce my risk.
   1. Stock at $55, short 50 put for 50 cents. Stock falls to $50, my 50 put is ATM and worth $2.00 (unrealized loss $1.50). 10 days left and I Want to increase my probability of profit/give the stock time to recover.
   1. Roll out to the next month and down in strike to a lower delta.
   1. Order: Buyback Feb $50 put for $2 debit, sell March $45 put for $1 credit. Net DEBIT $1.
   1. Delta perspective. Closing 50 delta put, opening a 20 delta put.
   1. Did I improve my probability of profit? YES, from 50% to 80%.
   1. What did it cost to improve my probability of profit? $1 debit.
   1. When rolling DOWN a naked put, you could go further out in time to make it a credit trade. Instead of rolling down 1 strike and out 1 month, I might roll down 1 strike and out 2 months.

Overall profit if the new naked put expires worthless is the INITIAL CREDIT from the first naked put +/- CREDIT/DEBIT to roll.

1. Feb 50 naked put for 50 cents credit.
2. Rolled to Mar 45 naked put for $1 debit.
3. Max profit if Mar 45 naked put expires is: a loss of 50 cents.

Compare the loss on the first naked put to the gain on the second naked put.

1. Feb 50 naked put for 50 cents credit. Later bought back for $2 debit, loss was $1.50.
2. Mar 45 naked put for $1.00 credit. Expires worthless, gain was $1.00.
3. Net loss 50 cents.

INCENTIVE for rolling at a credit is that as long as one of the puts eventually expires worthless, your profit is all the credits you got along the way.

If you’re focusing on the CREDITS only, you may not be able to increase your POP as much. You can’t roll as far OTM on the new trade and still a credit.

What’s more important? Getting a credit to roll? Or, increasing your POP aggressively?

Not a right answer. Just make sure you like the new trade. Don’t force it.

Math: How much does it cost to roll?

Cost of buying back the old put (5 cents debit) + premium received from selling the new put (60 cents credit). NET CREDIT: 55 cents.

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