This article describes how the strategy of rolling out options offer an amazing ability to generate extra profits to an existing position and, more importantly, it offers remarkable protection to a present or upcoming adverse situation.
It?s high time you look closely at this very valuable feature, for those who’ve not yet discovered the benefits of rolling out options. Roll outs not only offer additional profit generating advantages but more importantly it provides an extraordinary ability for limiting or eliminating potential losing positions. Before going on to outline the remarkable benefits of using the rollout process let?s be sure we understand what it means by rolling out an option. It is simply the closure of one option position and the initiation of another position either farther away in strike price or farther away in expiration date, or both, with the purpose of making an existing condition more beneficial to you.
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There are many situations where option rollouts may be used. For purposes of this article, being limited in scope, I will just touch on two of the most practical uses of the rollout process. The first is the benefits it gives the covered call player. The second is the remarkable ability of the rollout feature to offer protection against the potential for loss that faces the naked option writer.
How does a roll out benefit the covered call player? Consider this scenario: you own 500 shares in a corporation which you originally bought some time back at a price of $50. Assuming the market has lately gone on an uptrend and your stock has now appreciated to $60. You are tempted to sell and take in profits from your investment. At the same time you don?t Want to miss out on any further upward movement the stock may be taken in the face of what seems to be a strengthening market. Yet you’re also fear that the market might reverse direction and you could then lose part of the profits you?ve Already achieved. Selling call options against your stock enables you take part in any future appreciation of your stock. The profits generated from the option sale provides some protection if the market should change direction forcing you to exit your position.
If the stock continues rising and hits the strike price at which you sold the calls, you’re faced with two nice choices. Let the option holder call the option (exercise his right to purchase the stock at the strike price you sold it for) or, roll out the options to a farther expiration and strike price once again allowing you to engage in further gains if the stock continues its upward trend. If you let your options be called you have gained not just the money from the option sale but also from the appreciation price of the stock at the time the option is called. But if you roll out the calls you could continue to remain in the game for a further appreciation in the worth of your stocks. Of course there is still the potential of a market reversal and losing the potential for further appreciation. Even so you still have gained the premium money you gained in the sale of the calls. If the market continues uptrending you can ride the appreciation wave by rolling out your positions several times up to and until you run out of future strike prices. By this time you’d have gained substantial profits.
Now let?s see how the roll out benefits the naked option writer. When you sell a naked option, be it call or put, you theoretically face the risk of unlimited losses in your position by virtue of the fact that if the underlying security moves against you the potential for loss is unlimited. The term?theoretical risk? Is used here because this risk has been blown out of proportion and grossly exaggerated. While the potential risk of loss does exist it?s a negligible one if you employ appropriate strategies to defeat it. Please see another article on this topic entitled?Risk of? Unlimited Loses? In Naked Option Selling Is A Myth? Where it talks about this theoretical risk being totally controllable using proper defensive strategies. One of the defensive strategies mentioned in that article is the point of roll outs.
Here?s a scenario that may face an option writer. Let us suppose you sold naked puts several strikes out-of-the-money with expiration forty to sixty days away. Some time during its life the market turns against you and began to drop down to the price level of the strike you sold. Many option traders would just close out the position buying back the puts at a higher price and taking a loss. You being the smart trader would roll out your puts by buying them back at the now higher price and during the same time sell new puts farther out in time and several strikes out-of-the-money at a higher price than you bought back your puts. You?ve Just converted your original 40 or 60 day puts into longer expiration puts thereby avoiding taking a loss at this point in time. The process of closing and opening positions can be made as a spread trade and in so doing you’re paying reduced brokers commissions.
If the market continues its downward trend in addition, you can keep rolling out your positions repeatedly till you reach a point where there are no longer available future options to roll out to. At this point your puts may be so far out in the future that even though it goes deep in the money chances of it being exercised are slim. There is an e-book written on this topic titled?Stock Options: The Greatest Wealth Building Tool Ever Invented? Where the roll out process is described in much detail, along with other protective strategies for naked option traders. The e-book contains numerous actual trading illustrations of the usage of the roll out process. See this article?s author profile for more information.
If you’re going to be an option trader or already are one, rolling out is a must strategy in a large number of your option trades. You will find the strategy highly rewarding and in many instances offers a range of choices to your trading styles. Not only does it allow you to increase your trading profitability but more importantly it affords you the ability to protect your trade positions against certain adverse conditions. As this article is written today, we’re in the middle of a financial crises as never seen in a long time. The stock market has now depreciated to panic lows with investors seeing the amount of their investments evaporate into thin air. Yet for many option traders extensively using the roll out process they’ll weather the storm much better than some and they’ll certainly recover much faster when economic conditions turn for the better.