But another alternative could be rolling your options position.
Why would you roll an option? Perhaps you think buying more time will help generate a potential profit; maybe you want to avoid getting assigned; or perhaps the outlook of the underlying has changed and you want to try take advantage of it.
Introducing Strategy Roller
But as expiration gets closer and the underlying is relatively flat, you worry that you might get assigned. Rolling options of waiting until expiration to find out, you might roll the short calls from one month to the next and choose a different strike price.
Second, regardless of whether your option is set to expire ITM or out of the money OTMrolling the option allows you to replace a position with little or no time value with an option that has time value.
Typically, the more time value an option has, the greater the profit potential in your covered call position. How soon should you start trying to roll?
Which expiration date should you choose? Should you roll up higher strike price or down lower strike price?
At what point might you switch from a limit order to a market order and wrap up the transaction?
Think about the workload if that checklist applied to several options trades. Fortunately, there are tools that can take on some of the burden.
Updated May 20, What is a Rolling Option? A rolling option is an options contract that grants a buyer the right but not the obligation to purchase something at a future date, as well as the choice to extend the expiration date of that right, for a fee. Rolling options are most commonly used in real estate construction and development.
Selling a call option against your stock position each month allows you to potentially collect the options premium as income minus any transaction fees. But this means that as you get closer to options expiration, you have to think about rolling your option in order to maintain your covered call position.
In this latter case, there are strategies that traders can utilize in order to defend or redeploy capital. One popular method of trading challenged or losing positions is the concept of " rolling ," which was recently discussed on an episode of Know Your Options. On this particular segment, hosts Liz and Jenny delve deeper into why traders roll as well as some tastytrade research that helps illustrate how traders can successfully navigate troubled waters.
Option trader personal account thinkorswim, select the Monitor tab, then Strategy Roller. The Strategy Roller can be found on thinkorswim under the Monitor tab.
The chart on the right can be helpful in making your selections. For illustrative purposes only. Past performance does not guarantee future results. A positive value selects an out-of-the-money strike, and a negative value selects an in-the-money strike. Alternatively, you could select a strike based on the options delta.
Once you decide on your roll rolling options, pick your target expiration. Choosing a shorter-term expiration allows you to potentially collect premiums with greater frequency but may incur frequent trading costs as well.
On the other hand, although a longer-term expiration may delay your potential credit, premiums could be larger thanks to the increased time value in longer-term options. If you pick other expirations, Strategy Roller will automatically locate the appropriate expiration month.
How to Roll Options
Every Strategy Roller trade begins as a limit order that defaults to the midpoint price. You can decide how many days prior to expiration you want to start to roll your covered call. Strategy Roller mimics this tendency by pricing your limit order more aggressively as expiration approaches.
The Good News? With well-executed moves, you also potentially avoid some of the costs associated with a failure to roll.
Those can include losing out on a potential periodic income stream, having your stock called away, or possibly enduring some unanticipated tax consequences that may come from the premature sale of your stock.
Keep in mind that rolling options strategies can entail additional transaction costs, which could impact your potential return. Market conditions are always changing, and your open positions are likely to rolling options to those changes. Keep in mind, there are different ways to roll options that can be applied to different options strategies.