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To Roll or Not To Roll?

Rolling Trades


Rolling is one of the most common ways to adjust an option position.   To roll a trade, we simultaneously close our existing position and open a new one.

It’s possible to roll either a long or short option positions.  When we roll a short position, we’re buying to close an existing position and selling to open a new one. We’re adjusting the strike prices on the options, and / or “rolling” the expiration further out in time.

A roll can be done using the same strike price for the new one as the old one, or a new strike can be set. If the new contract has a higher strike price than the initial contract, the strategy is called a “roll up,” but if the new contract has a lower strike price, it is called a “roll down.” These strategies may be used to protect profits or hedge against losses.

But rolling is never guaranteed to work. In fact, we might end up compounding our losses.

Fortunately, backtesting rolling strategies can be easily accomplished using OptionStack.

Example


For the purposes of this tutorial, we will sell a put vertical spread and roll the vertical spread when the short strike of the put is hit.

We’ll enter a put vertical with the following requirements:

  • 45 – 50 days to expiration
  • short strike between 20 – 25 delta

Click here for details on how to use the Strategy block. 

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Rolling The Vertical


We will roll the short put vertical spread when the short strike is hit.    We will roll the short put vertical further out-of-the-money, and further out-in-time.  Furthermore, we’ll roll the spread for net zero cost by automatically increasing the position size as needed.

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Define the condition when to roll:

  • WHEN the stock (GLD) crosses above the short strike of the short put vertical

Define rolling using the Strategy block as follows:

  • Select “Roll From” as an action on the Strategy block
  • Size By netRollCost equal to zero.  Position size will automatically increase / decrease to accomplish the roll for even or better.
  • Roll further out in time (30 – 60 days) and further out of the money (5 – 10%)

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