managing options Archives - Page 2 of 2 - Data Driven Options Trading

The power of rolling Iron Condors

In the bear market of early 2022, I re-discovered a strategy that I had mostly discarded during the bull market of the preceding years, the Iron Condor. The Iron Condor is primarily a neutral trade that when managed with aggressive rolls can provide good returns in choppy, down-trending markets. My goal is to maintain a position that can tolerate fairly big market moves up or down, while benefiting from time decay.

I had discarded the Iron Condor trade because I found I was always losing on the call side of the Iron Condor. Initially, I liked the idea of making money on both sides, but I found in a constant up market, I often lost more money from calls than I made from puts. So, I switched to mainly put spreads and other short put strategies, which did great. But then 2022 came along, and it was clear that the market was no longer going up, and that we were heading for a bear market. I started adding credit call spreads to my credit put spreads to balance risk and have a neutral strategy. Over time I saw that some of my set ups and management strategies were working better than others, so I investigated and came up with a process that now works well in the current bear market environment.

The basic setup of an Iron Condor

Selling Iron Condors is an extremely common option trading strategy. The strategy is a combination of two calls and two puts, four separate options working together. Usually, an out of the money put and out of the money call are sold, and then a further out of the money put and call are purchased to define the risk and reduce cost. The trade wins at expiration if the price ends up between the short strikes, and hits max loss if the price moves beyond one of the long strikes. However, I rarely if ever hold to expiration and roll my position way before expiration is a concern.

Here is an actual California Condor with a profit curve of an Iron Condor option trade drawn over it.

An Iron Condor is named after the shape of the profit curve at expiration, which kind of looks like a condor with a bit of imagination, kind of like how star constellations are named. The iron part of the name designates that it is made up of a combination of puts and calls, as opposed to a put condor, or call condor which has four legs of the same type of contract. An example of a put condor is the broken wing put condor strategy I have described in a separate post.

To build on the condor metaphor, the difference in option strikes are often referred to as the body and wings of the combination trade. The body is the difference between the short put strike and the short call strike. The wings are difference between the call strikes or between the put strikes. The wings on the puts may be equal in width to the wings on the call, or they may be different. Wings that are different widths might be call unbalanced, or broken wings, as the profit profile will no longer be equal levels each end of the price ranges of the trade.

My preferred Iron Condor setup

What I have determined works best for my management strategy is to use the S&P 500 index options (SPX), targeting a starting point 28-35 days from expiration, with option Delta values of 30 for the short strikes and around 20 for the long strikes. I like equal width for the put side and call side, so the Delta values for calls will be a bit wider than the put side, and the net Delta of the Iron Condor will be slightly negative. With implied volatility between 20 and 30%, I generally target 100 wide wings, with the body between the short put and short call of around 15o points on SPX.

Premium and Greeks for Iron Condor — Here is the setup of an actual trade from early 2022 on SPX using the criteria from this post. In this example 30% of the wing width was collected, and a little lower deltas were used.

Profit Curve — For the above example trade, the goal is to keep in the profit zone for the first several days of the trade- the positive area under the 21 DTE curve.

I use SPX because it is the least likely underlying to have outsized moves. It is also very liquid to trade, has tax advantages in taxable accounts, and has expirations multiple times per week in the timeframes I trade. Depending on account size or type, other option products for the S&P 500 may be appropriate and can be used instead with essentially the same strategy. Other indexes or even individual stocks can be used, but managing can tougher with bigger moves, less expirations, and less liquidity.

I use 28-35 days to expiration (DTE) because my position can tolerate most reasonable moves while still having decent decay. I’ve used timeframes as low as 7 DTE, but find that many one day moves can push a position out of the profit zone, and I find myself fighting a losing battle too often. Longer durations of up to up to or over 100 DTE can work, but decay is slower, and there are very few expiration choices to roll to for the way I like to manage. All that said, my plan can vary to different timeframes, with the goal that I will only hold the position for somewhere between 1/10 and 1/5 of the time left to expiration- for example, a 30 DTE would be held 3-6 days before rolling, while a 100 DTE position would be held 10-20 days.

I choose 30 delta for short strikes and 20 delta for long strikes because they are the most forgiving in a move, while still offering reasonable decay as a spread. Higher deltas allow for more premium to be collected, and price movement will often be well tolerated as the long strike of the tested side will increase and the short strike of the untested side will decrease in value, compensating for much of the increase in value of the tested short strike. The goal of my management strategy is to keep this relationship intact, so that price movement has little impact on my option position value. I think of the area where deltas of the four options balance each other out as the profit zone. Staying in the profit zone allows Theta, or time decay, to do its work and deliver profits. I have used strikes with a bit higher delta values, but if too high, the two sides will get tested more often and then require more management. In the past, I often used lower delta spreads for safety and better percentage decay. However, I have discovered that low delta positions don’t actually tolerate price movement well because the untested side of an Iron Condor quickly runs out of premium to offset any of the movement of tested side. This observation has been a game changer for my use of Iron Condors.

I use equal width wings on the Iron Condor for a couple of reasons. Equal width seems to tolerate price movement, both up and down. Equal width also leads to a net negative Delta position, decreasing the total position profit when prices go up and increasing profit when prices go down, which is good in a bear market where downturns are frequent. Negative delta actually is somewhat neutral if the value is only slightly negative- Iron condors also have negative Vega, or decrease profit when implied volatility goes up. So, typically when prices go down, implied volatility goes up, and impacts of the negative Delta and negative Vega cancel each other out.

My Iron Condors are opening somewhere around 50% of the width of the wings. For example, if I have 100 wide wings, I would expect to collect $50 premium. I initially resisted this, thinking that the probabilities would be too low. However, since the time in the trade is so short, and I plan to actively manage moves against my position, I find that the risk reward ratio becomes favorable. However, the example trade that I’ve used is a little wider body and collected only 30% of the width.

Strikes compared to EM — This chart shows previous market movement at the time of entering a trade, along with the expected move based on implied volatility and boxes to illustrate the strikes of the Iron Condor. The dates are the opening date, the expiration date, and the planned target date to close. This trade used long strikes that were at the expected move at expiration.

I have devised a graphic that may help to visualize this setup in regards to the expected move and time frame of the trade. The graph has several components- a historic rendering of what the index has done for the past several weeks, a curve showing the expected move for the next several weeks based on current implied volatility, and two boxes to represent the put and call strikes shown from the time of opening until expiration, and the target date to take action. My point with this chart is to show that while the strikes chosen are within the expected move at expiration, they are outside the expected move through the time I expect to be in the trade before I manage it. Said another way, if the position were held to expiration, it is very likely it would be breached on one side, but because the plan is to manage early, a breach is not likely- it would take an outsized move beyond the one standard deviation expected move.

Managing the trade with rolls

I manage my Iron Condor with what I think is a fairly unique rolling strategy. I roll my positions out in time and change all strikes in the direction that price has moved. If price goes up, I roll all the strikes up. If price goes down, I roll all the strikes down. I just roll whichever way the market goes. Here’s the interesting part- if I keep in the “profit zone,” I can roll up or down for a net credit with each roll, and my existing position will have a net profit. Usually, one side will be sitting with a profit and one side with a loss. The losing side is being tested- its strikes have higher deltas than when the trade started. The profitable side will have lower deltas than when the trade started. My profitable side should have a bigger profit than the loss of losing side. When I roll, I will likely have to pay a debit to get my losing tested side back to a good set of strikes at the new expiration. However, I should be able to collect a bigger credit on the profitable untested side than my tested side cost. Ideally, every roll is closing a profitable trade and collecting a net credit to open its replacement. All of this sounds great, too good to be true, but there are a number of details to unpack.

The first challenge is to stay in the profit zone. My general rule is that if I keep my untested short strike must never drop to a Delta value below 15. The reason is that when the Delta of the untested side gets below this point, it quickly stops being able to meaningfully contribute to offsetting price movement in the tested direction. For example, if the price drops, the short call will get further out of the money and drop in value, while the puts will go up in value. For a while the Deltas will mostly balance each other out, but as the Delta of the short call drops below 15, the put spread will start increasing much faster and the calls decreasing less. If this happens, it is time to act and roll all the puts and all the calls down to where there is again premium on both the put and call side. If price has gone up too much, it’s time to roll up all the puts and calls.

Actually, I try not to wait until the untested side gets to 15. I think of my position of having three possible states, green, yellow, or red. Green is when both short strike’s Deltas are above 20- everything is great and there is nothing to do. Yellow is caution, one of the short strikes are between 20 and 15, and probably will need to roll soon. Red is stop and take action, one of the short strikes is 15 or below, so it is time to roll immediately. So, my choice is clear for Green or Red, but I need to use some judgement in the Yellow state. If the day starts in the Yellow, I am more likely to let it ride for a while and watch to see if it recovers or gets worse. If the market has trended throughout the day and moved into the Yellow, I am likely to roll before the end of trading so I don’t end up deep in the Red overnight. If there is a strong trend pulling the position quickly toward Red, that may also be a good indication to act. Yellow is a judgement call.

I find that it is harder to have a profitable, credit roll when tested on a quick up movement. As mentioned earlier, equal width wings means that there will be a negative delta overall, and while volatility reduction can help, big up moves can be hard to stay on top of. That’s why this strategy works best in a bear environment, when the market is trending down.

Don’t over manage. Markets bounce around a lot, and it can be tempting to want to act on each little trend that happens. If I have the right strikes- the right body width and wing width for the market conditions, my position should be able to tolerate price movement. If I’m trading at 30 DTE, I want to wait 3-6 days between rolls, so I need to be choiceful about not rolling too often. If the market moves a huge amount in a couple of days, I may need to roll early, but then I’ll want to try to go longer before the next roll. The other thing to consider is that often the markets overshoot in one direction or the other, so I try not to move too far to chase moves that go on for days, and stay patient that the market will counter the trend.

If a position isn’t winning regularly and isn’t holding its premium in control, that’s a sign that the strikes aren’t right for the market and the duration. For a while I was trading 7 DTE Iron Condors on SPX with around 100 wide bodies and 50 wide wings. I would adjust nearly every day, but I couldn’t keep the position in the profit zone, and I often took losses. There wasn’t enough space in the body and the wings weren’t helping enough. By widening out the body and wings and adding more time, I found the position much easier to manage, and more likely to be profitable, and much less likely to take a big loss.

One way I can tell if I have a forgiving position is to compare my premium to the premium of the same position a few strikes higher or lower. For example, with Schwab StreetSmart Edge, I can pick Iron Condor as a strategy, pick an expiration date, pick a body width and a wing width. The application will then give me a list of strike combinations and premiums for those parameters. If all the choices around my preferred strikes have similar premium, then I know that price movement will have minimal impact on my chosen position. If there is a rapid change in premium for other strikes above or below my choice, it means my Iron Condor parameters are not very forgiving, and I should adjust time or widths or both. Other brokers will have similar ways to compare prices by shifting up or down all the strikes.

I have updated the earlier graphic to illustrate how a change in price over time will dictate the choice of a new position to roll to. The new price now dictates a new expected move, and new ideal strikes and expirations. Hopefully, this chart will help those that are fond of graphical illustrations.

roll down and out — After 7 days of mostly down moves, I decided to roll down my positions and roll out to a later expiration. In this image, the old position and expected move are there along with an updated expected move and new strikes.

Eight legs in the Roll

Since an Iron Condor has four legs, rolling involves closing four legs and opening four new ones. I don’t think any broker or exchange allows a eight-legged trade, so at a minimum this will take two trades to complete the roll. My preference is to roll the puts as a trade, and roll the calls as a trade. I usually start with the side that is being tested and might need a debit to roll to a new expiration and strikes. Then I do the other side, usually moving the same amount and keeping the same width, expecting to collect more to roll the untested side than I pay to roll the tested side.

At times, I may have a situation where I don’t have enough buying power to roll one side while the other side remains in place. If that happens, I’m probably using more of my buying power than I should, or the position is just too big for my account. It isn’t that big of a deal to manage the situation, however, I just close the untested side out and roll the tested side, then open a new position on the untested side. Worst case scenario, I can close the whole Iron Condor at once- freeing up its buying power, and then open a new one with the same buying power. As long as the wing widths are the same and the new Iron Condor collects more to open than the old Iron Condor cost to close, there should be a net gain in buying power. But again, any time buying power restricts a trade, it is probably time to pare down some positions in the account.

How Iron Condors tolerate price movement

Probably the best way to explain how an Iron Condor tolerates price movement is with an example. Earlier in this post I showed an opening trade from April 1, 2022. Let’s look at it again and look at how it fared after 7 days.

Notice that the premium collected is approximately $15 each on the put side and the call side.

Closing position — After a week, price has dropped to 4500, but the premium has dropped for a profit.

The premium on the put side has gone up to around 16.50, while the call side has dropped to just under $6.

So, after 7 days, the trade made about $800 on $10,000 risk, an 8% return. But, that’s just the start- the plan is to roll, and so the closing trade above was combined with the following opening trade:

new roll position — On April 7, this trade was opened while closing the old position for a net credit and strikes that are back at the edge of the expiration expected move.

The combination of closing the old trade and opening the new trade is a net credit of just under $14 premium. This is the result we are looking for- a profit on the trade being closed, and a credit to move out in time and get to better strikes for the latest situation.

And just to finish the example trade, let’s look out another week and see what happened to the market and the trade that was rolled to.

roll result — After rolling down, the market kept going down, but stayed within the new strikes with plenty of space to spare.

By April 13, the market had dropped even further, approaching where the puts from the original position had been. However, the roll down gave the new position plenty of space and the trade was sitting at a profit, and ready to roll again.

Closing the rolled position — After 6 days, the rolled position had decayed even after a market move. Again, puts lost money, but the calls made the position profitable.

This trade made $1430 in 6 days, a 14% return on capital. Since the market went down, the put side of this trade lost money, although not that much since the price didn’t end up that close to the put strikes since our new strikes were lower than the old ones. Time decay helped counter the price movement against the puts. The money was made on the call side through both price movement and time decay. In the end time decay, represented by Theta, eats away premium as long as price doesn’t get too close to the strikes.

These are examples of trades I did during the Spring of 2022 in the face of a bear market. Not every trade faired this well. Some market moves were too fast and too far for me to be able to roll before the position went too far to one side. But more often than not, this rolling methodology has kept me from having positions blown out, and keeps day to day portfolio value from varying out of control.

You may notice that the example trades shown here don’t exactly follow all the mechanics I’ve described. Since those trades I’ve become a little more likely to intervene early, although it’s a balance with avoiding over-adjusting.

Finally, I don’t always get my rolled positions re-centered, like I did in the example I presented here. Often, I’m happy to just move in the direction of the market and make sure my new strikes are a bit out of the money on the tested side. In this crazy bouncy market, we get lots of reversals, so I let my positions stay a little off when the market has moved a long way and technical indicators suggest the last several days move may be about finished. However, these choices come down to individual trader preference and market outlook. No one knows what is happening tomorrow or next week, so we each have to decide what trade is best based on the information available. For a real life example of this type of decision making in action, see my post on the Goals of Rolling an Iron Condor.

Good luck trading and rolling Iron Condors!

The Power of Community

Traders need access to other traders to share, learn, and teach each other. Online social media groups can provide that type of community.

Let’s face it. Trading options can be a lonely task. It’s just a trader and the computer screen. Whom can a trader turn to with questions, for encouragement, or to share success and failure? Virtually every person who I dare to tell that I trade options as a primary activity either have no idea what I’m talking about, think I’m crazy, or both. Most people who do a lot of their own investing don’t even know what a put or call is. Traders need a community of other traders to keep their sanity and keep moving forward.

When I stop and think about it, I personally know seven option traders that I have met in person. Only seven. Four of them I met through one of the others. And only a few of them regularly do the same kinds of trades as me. And I feel lucky to know that many. So, personal connections can only help so much.

There are lots of online services that traders can pay a small fortune to join to help learn to trade options. Some are follow the leader- buy or sell what the guru says and exit when the guru says. I tried a few of those and found it hard to time it right and even then I didn’t get the results that were promised. So, I’m not a big fan of spending a lot to watch others trade.

If you do a Google search about any topic concerning options, you’ll be bombarded with ads for paid services, but then below them will be lots of YouTube.com videos, and other sites, maybe even this one. There are lots of quality YouTube videos on options, but many that are dubious at best. I first discovered TastyTrade.com through watching some of their YouTube videos. Tastytrade has their own channel on YouTube, and I’d encourage subscribing. One TastyTrader that I enjoy watching is “Sweet Bobby” Gaines. He has a “Sweet Bobby” channel on YouTube. Look around and search YouTube for option trading, and find your own favorites to follow.

But even watching others still doesn’t give you community. There’s nothing like interacting with others. This is where social media actually can be a help. A feature on Facebook.com that you may not be aware of is “Groups.” Just click on the Groups icon and either use the “Discover” icon or the search magnifying glass to look for groups that specialize in option trading. Some are more active than others. Most are private and require you to apply for membership- this is generally to keep out spammers and robots who will ruin the experience. I’ve joined a number of groups- some I’m active in and others not so much. For groups that don’t have members doing strategies I have in interest in, I simply drop my membership. I now have a number of virtual friends from these groups. Some of them message with me on an almost daily basis. I’ve discovered numerous trading strategies to try from posts in these groups, and the banter from members gives the members a wide variety of opinions about different trading scenarios, positive, negative, pointing out risk, ways to manage, and success stories.

Another social site that gained a lot of traction in early 2021 was Reddit.com. Reddit became an overnight sensation for traders when a little-known group on the site called “Wall Street Bets” essentially cornered the market on the stock of GameStop, an almost bankrupt video game store chain. By realizing that there was a huge amount of short interest in the stock and a small float of tradable shares, the group started buying up cheap shares of stock, and bigger buyers followed, driving up the price. Many short sellers, including some large hedge funds were caught flat-footed and had to buy back their short positions at huge losses, further driving up stock prices, a classic short squeeze. Call option buyers joined in as well and market makers hedged by buying increasing numbers of shares also driving up prices. By the time the craziness ended the stock was up over 100 times the price when the buying started. This crazy action drew attention to Reddit and the “Wall Street Bets” group. Like many, I joined both for the first time to see what the fuss was all about. The group membership ballooned to an enormous number and the content turned to mush- just a lot of nonsense posts slamming each other and promoting hundreds of other crazy schemes. I dropped my Wall Street Bets membership after less than a week.

However, Reddit has a feature that suggests posts from other groups that it thinks a reader might like. I found some other groups that I started commenting on that were more serious and in line with my view of trading. Again, I met a number of new virtual friends and engaged in both public and private dialogs about trading strategies. Groups on Reddit are public to read and join, so there can be a lot of spamming behavior and many users delight in being very foul-mouthed in their responses. Rudeness is tolerated a bit much, in my opinion. However, I’ve found that if I stay on the high road in my posts and stay factual and data focused, people generally engage back with me in a respectful way. It’s kind of a what goes around, comes around. In fact, the site has a measure called karma that is based on how well your posts are received by others. People who are mean and overly negative end up with negative karma and many of their comments get deleted by moderators.

Another social site that I’ve found helpful is Discord.com. Discord was started as a way for gamers to chat with each other in private rooms, and have discussions in groups on a private “server.” Once you join Discord, you can set up your own server, or join public servers set up by others. As it applies to traders, individuals will set up and organize a server and invite others to join. Many people have private servers by invitation only. Some of my local friends set up a server like this and invited me- I like the familiarity of the small group and we get along well with each other. I’m also a member of a number of other groups. A nice feature is that anytime someone posts a response to a server, I can have a notification pop up on my phone, or I can choose not to- the choice can vary from server to server. So, I have notifications on for some servers and off for others. The idea is that like-minded people can have an ongoing private dialog about their trading. Some conversations are based on users posting each of their trades for comparison and comment. So, a group of 0 DTE traders might each post their opening and closing trades, and then discuss what went right and what went wrong, critiquing themselves and other members on strategy. A Discord server can be very busy, or not busy at all- it depends on the number of users and how active they all want to be.

Twitter.com can be another source for information on trading. There are lots of famous and not so famous traders and information sources that tweet out information on a regular basis. I personally don’t have the bandwidth for it at the moment and don’t use it much. However, I know lots of traders love it. TastyTrade has a daily show, the Liz and Jenny show, where much of their discussion is based whatever Twitter posts use the hashtag #LizJny, which has fostered a community feel. Other shows on trading networks and CNBC have similar features and hashtags. Many high profile traders will respond to personal tweets or tweets that use an @ reference for them. However, the format really doesn’t lend itself to in-depth discussions. Often, it just allows tweeters to refer followers to content that the tweeter thinks is interesting.

I used to be a big fan of LinkedIn.com and its groups. Now, I think other social media resources have taken the lead in being sources of interaction with like-minded traders. I joined a few trading groups, and I have to say that I’ve been disappointed so far. Maybe new groups will emerge that will be better for the trading community, but I’m still waiting.

I know TikTok.com is gaining ground in this space as well. Similar to YouTube, TikTok offers videos, generally short in duration, and based on your reaction, the site steers you to similar content that might be appealing. As I write this, it seems a bit of an immature community currently, but by the time you read this in the future, TikTok could be the greatest resource available. We’ll see.

This is just a start. Feel free to leave your favorite way to get involved in the trading community in the comments below. New forums and sites are emerging all the time and providing new opportunities to connect with other traders. I’ll refrain from naming any specific groups on any particular site, because if you are reading this years from now because I haven’t updated it, there will likely be many new groups and sites to join and find community.

From my website Analytics, I can see that over half the hits to my site come from people clicking on a link to this site from a post someone referenced on a social media site. It used to be just me that did that on occasion, but lately others are finding this site and sharing it with their groups and trading friends. I really appreciate it when readers of this site find it helpful enough to copy a link from this site and share it with others. People seem to like the pages I have on my favorite trading strategies. I hope that you find some community here as well and find content worth sharing. Your comments are always appreciated, even it is a pain to leave them. It’s a challenge to have a site like this that doesn’t get nailed by spammers and hackers, so I have to put up some hurdles to allow comments.

Remember, the whole point of this post is to give you ideas about connecting with other people who understand the kinds of struggles you face as a trader, and give you a chance to give back to newer traders. Discussing trades on social media is the only place where I can discuss the merits of 20 delta short strike on a wide put spread, and know that most of the people reading will not only understand, but have an opinion to share back with me. That won’t happen at the next neighborhood block party. You aren’t crazy. There are people out there that get what you are trying to do and will be happy to have a discussion about it. You just have to know where to look. That’s the power of community, even when your community is spread around the world.

Rolling Losing Positions?

I recently responded to a social media post which asked why there is so much hate out in the social media world regarding rolling losing option positions. If you frequent any discussions about managing option trades, and someone discusses rolling a losing position, there will be some critic who comments to say that rolling options is horrible and locks in losses, and is a low probability trade, and basically is un-American. I sometimes get these kinds of responses myself, and if you read much of what I write, you know that I disagree with that. Rolling is a key part of many of my strategies including the rolling 7 DTE trade that I frequently trade. So, the following is my thoughts on rolling losing option positions.

As someone who rolls almost all my positions, win or lose, and often writes about it, my thought is that a lot of people that write negatively about rolling don’t really understand the benefits. It isn’t an issue that everybody should roll, or that nobody should, but more that it is a method that works well for a certain mindset. Some traders approach managing trades very differently and that’s great for them.

I think the issue is when the discussion comes to managing a losing position. There’s really three choices: hold, stop, or roll. A legitimate argument can be made for each approach, but I think the right answer comes down to the type of position that is in trouble, the trader’s view of the market probabilities looking forward, and personal preferences around risk and reward.

I roll my credit put spreads on SPX in virtually every situation. I want to avoid expiration drama, so I never hold to expiration. When I used stops in the past, it seemed like I got stopped out just as the market bottomed out and I found that frustrating. I now specifically seek out trades that accommodate rolling options and develop mechanical triggers on when and how I’ll roll a position.

For me the benefit of rolling a losing position is giving myself time and space to be right. I almost always collect a credit for a roll, so I’m paid to wait for a turnaround. Each roll improves the cost basis of my trade. When my position is being tested I try to roll both down and out for a credit, so that I don’t need a full recovery to come out with a profit. Since most of my positions are credit spreads, I do have an issue that if my position gets in the money, it is no longer able to roll for a credit, and I’m forced to pay a debit to stay in. Because my positions start at least an expected move away from the initial price, I rarely end up in the money paying a debit. I’ve found that with the trades I do, I collect credit 97-98% of the time, and the debits I pay have generally been about the same as the credit I get when I’m rolling a winning trade which happens much more often.

The big benefits I see from rolling credit spreads is that I keep time decay working for me 24/7. I don’t have to decide when to jump back in after being stopped out because I’m never out.

For those that say that rolling locks in a loss and puts you in a worse position, I understand that the act of rolling options, closing a losing trade and opening one is truly closing a losing trade. However, my new position is poised to earn all the loss back plus a profit beyond. Usually, when rolling a loser, the market is approaching an oversold situation and is increasingly likely to start back up. Since almost all my rolled positions are still out of the money, I usually still have positive expectancy and better than 50/50 odds of a profit. Market downturns are the best time to buy, so in many ways I’m forcing myself to buy the dip.

Rolling losing option positions does introduce a lot of volatility into a portfolio value. I get great returns through rolling, but my positions’ marked values go up and down more than many people can tolerate, and I understand. Every strategy for management has pros and cons, and some are no-goes for some traders. Each person has to find mechanics that match their tolerance for risk, and expectations for return.

It isn’t easy emotionally to roll in tough markets, but I don’t think it is any easier to take a loss when you are stopped out. I lost a lot just today, Nov 30, 2021, and did a number of rolls as part of my mechanics. However, I’ve been through this numerous times before, recovering fully each time, and built up cash reserves in good times, so that I’m ready for whatever the market is going to do.

Some types of trades just aren’t made for rolling options. For example I won’t roll a credit call spread that loses because I find they just compound losses as the market drifts higher more often than it falls, and it isn’t a fight I can win consistently. I don’t use rolls as much in individual stocks because moves can be extreme and last a long time. I don’t try to roll trades on expiration day because the numbers don’t work out. So I do have limits and don’t blindly roll every kind of trade. I find that many people critiquing rolling as a strategy are talking about one of these losing situations that even I won’t roll in.

I’ve had many people reach out to try to understand rolling options and from their questions I can see that it is a hard concept to grasp. I love it when the lightbulb comes on for someone, and it is also troubling when someone misses the point and drops a position, closing at the worst possible time. I usually get a few messages of a bad loss on days like last Friday or today, but I also get nice thank you notes from many more when the market goes up after a downturn and the person came out of a down market with a profit overall and their account at new highs.

I know my rolling approach isn’t for everyone and that’s okay. But it works for me. If it doesn’t work for you, then do what does work for you, and maybe learn a little more about rolling before you bad mouth it out of hand.