SENSIBLE OPTION ROLLING -- BREACHED IC'S & SHORT STRANGLES
Let's face it. No one really likes to roll their options positions to a later expiry, but sometimes you just have to, whether it is to give the trade a bit of additional time to work out or to mitigate your loss.
Here are some basic guidelines I use regarding rolling where there has been a breach of a side of your iron condor or short strangle:
1. Always roll for a credit (for credit spreads, naked shorts). If you can't get a credit for one expiry, look farther out until you can get one.
2. If you can improve the position in some fashion and get a credit, do that.
3. Consider timing of the roll. There are various considerations as to the timing of the roll. For oppositional set-ups such as short strangles and iron condors, I generally roll out where there is a breach and the untested side is at or near worthless, since the untested side has reached near maximum profit and serves little or no purpose if price continues to move in opposition to it. In that particular case, I will not only want to roll the tested side for duration and credit, but the untested side to complete my setup, too (although there are times when you might want to wait until a more favorable time to "rematch" your setup, particular if volatility in the underlying is low at the time of the roll of your tested side).
4. Be prepared to roll more than once. If you hated it the first time, you'll hate it even more the second, third, or fourth times you have to roll. But if you roll each time for credit, you are accruing credit.
5. Be aware of what it is going to cost you in fees and commissions to roll. When rolling, make sure any roll you consider is for a net credit, after fees and commissions.
6. Don't force a credit onto the trade. If you've played with short verticals at all, you'll know that if you widen the spread between the short and long leg of the spread, you can increase the amount of credit you receive for that vertical; the downside is that you increase your maximum possible loss. Don't do it on a roll to force a credit onto the setup; if you can't get a credit for the width of the spread, don't widen the spread to get one.
7. As a last resort, considering financing a roll for which you cannot get a credit with an additional setup, such as an oppositional setup, a naked short, etc.
8. If you can't make the roll work without taking on an undue amount of risk, walk away from the trade.
Notes: I use slightly different considerations when rolling, for example, a standalone short vertical, which is a defined risk trade. From a psychological standpoint, I like to roll these fairly quickly after breach, because I just can't stand being in call and want to take advantage of price action at the time of breach to roll for duration and credit and potentially improve my chances of success by rolling to more favorable strike prices. When I set these up, after all, the strike prices are generally and at the very least outside the expected move for the expiry, so price action is at an extreme at the time of breach; I want to take advantage of that before a retrace.
Here are some basic guidelines I use regarding rolling where there has been a breach of a side of your iron condor or short strangle:
1. Always roll for a credit (for credit spreads, naked shorts). If you can't get a credit for one expiry, look farther out until you can get one.
2. If you can improve the position in some fashion and get a credit, do that.
3. Consider timing of the roll. There are various considerations as to the timing of the roll. For oppositional set-ups such as short strangles and iron condors, I generally roll out where there is a breach and the untested side is at or near worthless, since the untested side has reached near maximum profit and serves little or no purpose if price continues to move in opposition to it. In that particular case, I will not only want to roll the tested side for duration and credit, but the untested side to complete my setup, too (although there are times when you might want to wait until a more favorable time to "rematch" your setup, particular if volatility in the underlying is low at the time of the roll of your tested side).
4. Be prepared to roll more than once. If you hated it the first time, you'll hate it even more the second, third, or fourth times you have to roll. But if you roll each time for credit, you are accruing credit.
5. Be aware of what it is going to cost you in fees and commissions to roll. When rolling, make sure any roll you consider is for a net credit, after fees and commissions.
6. Don't force a credit onto the trade. If you've played with short verticals at all, you'll know that if you widen the spread between the short and long leg of the spread, you can increase the amount of credit you receive for that vertical; the downside is that you increase your maximum possible loss. Don't do it on a roll to force a credit onto the setup; if you can't get a credit for the width of the spread, don't widen the spread to get one.
7. As a last resort, considering financing a roll for which you cannot get a credit with an additional setup, such as an oppositional setup, a naked short, etc.
8. If you can't make the roll work without taking on an undue amount of risk, walk away from the trade.
Notes: I use slightly different considerations when rolling, for example, a standalone short vertical, which is a defined risk trade. From a psychological standpoint, I like to roll these fairly quickly after breach, because I just can't stand being in call and want to take advantage of price action at the time of breach to roll for duration and credit and potentially improve my chances of success by rolling to more favorable strike prices. When I set these up, after all, the strike prices are generally and at the very least outside the expected move for the expiry, so price action is at an extreme at the time of breach; I want to take advantage of that before a retrace.
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