Rolling a Position: As Used Outside the Options World

I was reading The Curious Capitalist, a blog written by two writers at Time Magazine, when I came across this:

Alan White, a law professor at Valparaiso University in Indiana, looked at a pool of 4,342 sub-prime loan modifications reported between July 2007 and June 2008, and found that the aggregate amount of the loans increased from $912 million to $933 million. That's because one of the most popular modifications is to simply spread missed payments over the remaining life of the loan. Not surprisingly, that sort of change often only works as a short-term fix; re-defaults are a huge problem.

Bert Ely, a banking industry consultant I talked to, was pretty negative on the whole effort. “During the S&L crisis, we had a saying: a rolling loan gather no loss,” he said to me. “All you do is roll the problem forward, and I have a feeling that’s how a lot of these loan modifications are going to turn out."

That conclusion certainly sounds familiar:  Rolling the problem forward.

Rollling pin

Many an option trader believes that he/she should never admit that a position has lost money and simply take the loss and move on.  Instead the position is rolled to a more distant strike price and (usually) to a more distant expiration month – with the hope that when the new position expires,the current losing trade will be transformed into a break-even trade, or better.  That goes along with the quote above:  'A rolling spread gathers no loss.'

IMHO, that's a losing methodology.  There's nothing wrong with rolling a position per se, but it's not a strategy that should be adopted merely to avoid a loss.  To me, rolling is a combination of decisions, and each should be made on its own merit:

  • Do you close?
  • If yes, do you have a good, new trade to make? 

The truth is, no loss was avoided.  The position was losing money and was closed at a loss.  End of story. The trader now has a new position, but often convinces him/herself that no loss was taken because the old trade is still 'alive' in another form.

If a trade is too risky to hold, then close it – and forget about it.  Then, if and when it's appropriate, you can open a new position.  If there's no suitable trade that fits into your comfort zone, don't force the new position.  If a trade begins outside your comfort zone, then the position is already in trouble. 

Your goal is to make money from a new position and thus, it's essential to make a trade you want to make, and not force a trade just to accomplish a roll – in a desperate attempt to avoid a loss.

The point of this post is to illustrate that option trading is similar to other aspects of our everyday lives.

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