Roll a Position: A Risk Management Tool

When trading, risk management is an essential skill. There are many ways to control risk and it is difficult (if not impossible) to compile a complete list. However, at the top of the list is one easy-to-understand concept: Position size. That means that traders should always be aware of what can go wrong with every position and be certain that your account can survive the worst-case scenario.

Roll Strategy

One very popular strategy for handling a position gone awry is the “roll”.

Rolling occurs when a trader covers the existing position and sells another position. The new position resembles the first — but the strike price of the option(s) and (sometimes) the expiration date change.

Rolling is used to avoid closing the position and taking a loss. However, it is necessary to understand that some positions cannot be saved. Thus, be prepared to exit and accept a loss whenever you cannot find a suitable roll. Translation: If you cannot roll the position into one that you truly want as part of your portfolio, then do not roll. It is always a bad idea to create a new position that does not fit within your comfort zone.

Rolling is a good technique when the trader understands how to manage risk. Too often position size increases after the roll. In general, creating a larger position is a bad choice because the money at risk also increases.

Here are a few articles that I recently published at about.com. Each discusses one aspect of rolling a position.

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2 Responses to Roll a Position: A Risk Management Tool

  1. Patrick 08/01/2014 at 10:47 PM #

    Mark,

    Thanks for another great article. So, would you agree the ability to manage risk appropriately is something which separates the good from the great traders?

    Yes and no.

    “No” because it takes the ability to manage risk well to become a good trader. Those who never grasp the importance of risk management are likely to fail and are very unlikely to ever become good traders.

    “Yes” to the extent that anything that we learn to do better, more efficiently, or more profitably gives good traders the ability to move beyond ‘good.’

    Althougt being a ‘great’ trader is a wonderful goal, the important part to remember is that we do not compete with any other traders on a ‘who can make more money with less risk’ level. If you, I, and every other trader can manage risk so that our accounts are never in jeopardy, so that large losses are very rare, and if we earn enough money to meet our needs and desires, to me that is the very definition of a great and successful trader. I know that in the eyes of the world, I will never be great. My discipline is not as good as it should be and I am not skilled when it comes to technical analysis. But I truly don’t mind. I never became extraordinarily wealthy, but that proved to be an unnecessary goal.

    Thans for the discussion.

  2. Patrick 08/04/2014 at 11:39 PM #

    Mark,

    Thanks for turning my question on its head with a great response! I think your comment is an interesting view point and one I haven’t seen advocated elsewhere.

    Keep the good posts coming!

    Patrick

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