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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