You can do many things with options, but you cannot truly save a losing trade. No one likes to lose, but taking your losses in a timely manner and moving on is almost always the best approach.
Now, rolling a position is one possibility if it is underwater, but it should be understood for what it actually can and can’t do. If you are in a losing position and you roll it, you are simply taking the loss and opening up a new position. The new position shouldn’t be taken just to “avoid” the initial loss. It should only be taken if it is really the position you want to end up with. That is when the roll makes sense.
If you have a trade that still fits within your trading rules, and it simply needs more time, then that is an appropriate time to roll. Another situation where rolling makes sense is if your trade is showing large profits. If you sold a put credit spread and it has lost most of its value, then rolling it up or up and out can be a great trade.
But there are many traders out there that “roll until they are right.” They don’t see the roll as taking a loss but as putting off their inevitable gains until a future date. This is a good way to tie up and burn through capital.
Let’s say that you sold an IWM call spread last week. With the IWM at $121, you sold the August 124/126 call spread for $0.45 credit. Now with the IWM at $125 the spread has widened to $1.20 and you have a $0.75 paper loss. You don’t want to just take the loss, so you decide to roll the position.
Many traders that are stuck in the “rolling” mindset will only roll for a credit, and one of them might look to roll out to the November 126/129 call spread for a credit of $1.25. When you opened the original position, the delta of the 124 calls was 0.27, so you had a 27% probability of having the spread expire in-the-money. The November spread has a 40% percent probability of expiring ITM.
The risk is increased. The original risk on the trade was $1.55 (the $2 spread – the $0.45 credit). Now it is $1.75. If the IWM continues higher, problems will compound, and the next roll will have to be more dramatic. You would have to move further away from the sweet spot of vertical spread selling in terms of time decay.
This is part of the reason that it is so important to have written trading rules. If your roll makes sense and fits within your well-defined rules, that is great. But if it doesn’t then it is just a form of “hopium” that you are buying more time for your trade to be “right.” Don’t strive to be right; strive to make money. And that usually means taking your losses and moving on to a better trade.
An odd but very clear example of this is Karen the “super-trader.” She became something of a hero to retail option traders after seemingly making it big with selling credit spreads. Just a few months ago the truth came out and it appears that she was simply “rolling ‘til she was right.” She was booking profits – and charging fees – only on “realized” gains or losses. By rolling her losing positions she was keeping them off the books. She was therefore losing lots of money while showing gains to her clients. Unlike in her case, the SEC is unlikely to come knocking down your door, but the rolling your losing trades is still a good way to burn through capital.
Simpler Trading is the market leader in interactive financial trading education. Founded in 2010, the company has provided expert guidance and coaching to over 350,000 customers across the USA and globally. Simpler Trading’s veteran team combines over 200 years of market experience and provides in-depth knowledge and actionable, real-time trading advice across stocks and equity options as well as futures and Forex. Using state of the art technology, Simpler Trading delivers daily training to thousands of users via webinars, one-on-one coaching, live trading, interactive chat rooms and mobile solutions.
{loadposition user99}