To Roll or Not To Roll. Another Question

Globetrotter submitted this question:

you have some near month vertical spreads that are in the money and
they just barely go out of the money, is it better to roll them to the
next month (for a credit) and then have not only more time but the
possibility to roll them back (again for a credit, I assume) if they
stay out of the money at options expiration?


This discussion is applicable to credit spreads and iron condors.

Let me begin with a general statement.  There is seldom a 'best' method for making specific trades because so much depends on the individual investor's trading goals, bankroll and comfort zone.

1) It's difficult to roll a CTM (close to the money) or ATM (at the money) spread for a credit, unless you take extra risk by selling additional spreads.  Why?  Because repurchasing the spread you are short costs approximately one half the maximum spread amount (i.e., paying roughly $5 to close a 10-point spread). 

There is no way to collect that much cash for any spread (in which the options are the same distance apart) that has more time remaining – unless you sell a spread that is even CTM than the one you are covering.  And that's not what you want to do.  I assume you want to sell a spread that is further OTM (out of the money).  To 'roll for a credit' you would have to sell a greater number of spreads than you are buying.  Although some people recommend doing just that, I am not comfortable with taking more risk in an attempt to recoup from a losing trade.  Of course, that is an individual decision.

2) Because you cannot get that credit you seek, once you decide to buy back that spread, it's a final decision.  You will NOT get a chance to roll back for another credit – unless the position moves ITM again.  And I assume you do not want to be selling a spread that is already ITM. 

If the market reverses and the spread you covered moves further OTM, you will NOT be able to roll back for a credit because that near-term spread loses value much faster than the new spread into which you rolled.

3) Deciding whether to roll the position when the front-month options are CTM is never an easy decision.  And I understand that's your reason for asking.

4) Rolling (one for one) requires paying a debit in this situation.  I have no problem paying that debit when necessary to reduce risk, but not every trader feels the same.  And, as mentioned, some sell extra spreads to collect a cash credit.

5) Here's my bottom line:  If the old position makes me uncomfortable, then I feel the need to close all, or part of the trade. 

Rolling to open a new position is a separate decision.  I do so ONLY when that new position is one I want to own.  I don't believe that rolling, in an attempt to prevent a loss, is a good idea.  Why?  Because when you cover that front-month spread per your description, you already have the loss.  I look at opening a new position as an attempt to make money next month, rather than as an attempt to prevent a loss from the current position.  Again, not everyone looks at it that way.  You should consider 'rolling' in a way that makes you comfortable.

Keep in mind that 'extra time' is not always beneficial.  With the markets being so volatile and making – what used to be considered – extraordinary moves frequently, extra time is extra risk.  Thus, as always, you must decide if the new position provides a decent risk/reward situation for you, rather than simply rolling and hoping for the best.  If you are not happy with the new trade, then don't make it.  Wait for a better opportunity.  Closing the old trade is a separate decision and by paying attention to your comfort zone, you will figure out what's best for you.  You cannot win on every trade.  I'm sorry I cannot tell you exactly what to do because there is simply no 'one answer fits all.'


One Response to To Roll or Not To Roll. Another Question

  1. Globetrotter 12/10/2008 at 1:38 PM #

    Thank you, Mark. Great answer. This sums up nicely the options (so to speak) I am evaluating to close my options spread.