Hey Traders and Investors! 👋
If you've been with me for a while, you know I love to talk about the wheel strategy, specifically selling cash-secured puts (CSPs) and covered calls (CCs) to generate consistent income and manage risk. Today, I’m diving deeper into an essential but skill: rolling. Rolling is like a tune-up for your options trades, helping us adjust when things don’t unfold as planned. I’ll walk you through the what, when, and why of rolling, with step-by-step examples to make this concept easy to follow!
Understanding Cash-Secured Puts and Covered Calls 🔎
Let’s start with the essentials:
Cash-Secured Put (CSP): When you sell a CSP, you’re agreeing to buy a stock at a specific strike price if it falls to or below that level by expiration. You receive a premium upfront, which is like getting paid for taking on that potential commitment. The “cash-secured” part means you’re setting aside enough funds to buy the stock if assigned. And here’s the thing: I only sell CSPs on stocks I’m comfortable owning, so assignment is no big concern. If I do get assigned, I’ll simply reposition the shares or start selling covered calls on them as part of my strategy.
Covered Call (CC): With a CC, you’re selling a call option on shares you already own. If the stock rises to or above the strike price, you’re prepared to sell those shares at that price. Meanwhile, you collect a premium, which adds income. Since you already own the shares, it’s a “covered” position, making it a lower-risk way to earn income.
Both strategies allow us to generate income, either through the premium received or by potentially buying or selling stocks at favorable prices.
What Does it Mean to “Roll” an Option? 🔄
Alright, so what exactly is rolling? Think of it as refreshing your trade. Rolling involves closing an existing option position and opening a new one with a different expiration date, strike price, or both. This adjustment gives you more control over your trade, allowing you to adapt to the stock’s movement and your goals.
Why Roll?
There are a few key reasons why rolling makes sense:
Give Your Trade More Time: By rolling, you can extend the expiration date, which allows the stock more time to reach your desired price level.
Capture More Premium: Rolling often gives you a chance to earn an additional premium, adding to your overall income.
Adjust the Strike Price: If a stock isn’t moving as expected, rolling lets you adjust the strike price to make the trade more favorable.
In short, rolling is a flexible strategy for extending, adjusting, and enhancing trades—while staying aligned with your strategy. 📈
When to Roll Cash-Secured Puts and Covered Calls 🕰️
Rolling can be a smart move when you want to:
Extend the Expiration Date: This gives the trade more time to potentially reach your desired outcome.
Adjust the Strike Price: Rolling allows you to capture more premium or reduce your exposure.
Capture Additional Income: Each roll provides a chance to collect another premium, increasing your income potential.
Key Points About Rolling
Still Obligated: Even when you roll, you remain obligated to buy the stock at the strike price if the put option is exercised or sell the stock at the strike price if the call option is exercised—just at a later date.
Managing Risk: Rolling allows you to manage risk by adjusting the strike price or expiration date depending on how the underlying stock price moves.
Potential for Net Credit or Debit: When rolling, you may need to pay a net debit if market conditions require you to buy back your existing option at a higher price than you can sell the new option for, or you may receive a net credit if conditions allow you to sell the new option at a higher price than the buyback.
Example 1: Rolling a Cash-Secured Put 💼
Scenario:
You sold a CSP on Company XYZ at a $50 strike price, expiring in one week, and received a $2 premium. XYZ is trading close to $49, near your strike price. Since I’m comfortable owning XYZ, assignment wouldn’t be an issue. But if I want to avoid assignment or collect more premium, rolling becomes an option.
Rolling Steps:
Close the current put option by buying it back.
Sell a new put option with a later expiration and possibly adjust the strike price.
Example Roll:
Original Position: Sold XYZ $50 put expiring in one week; premium received = $2.
Rolling Action: Buy back the put, then sell a new one expiring in three weeks at the same $50 strike for a $2.50 premium.
This adjustment:
Extends the time until expiration, giving XYZ more time to rise above $50.
Generates an additional premium of $2.50, lowering your cost basis if assigned.
Example 2: Rolling a Covered Call 📊
Now let’s say you’re holding 100 shares of ABC stock, currently trading at $100. You sold a CC on ABC at a $105 strike price, expiring in one week, and received a $1.50 premium. ABC is approaching $105, and you think it could go higher. Rolling this call could allow you to avoid selling at $105 while collecting additional income.
Rolling Steps:
Close the current call option by buying it back.
Sell a new call with a later expiration or higher strike price.
Example Roll:
Original Position: Sold ABC $105 call expiring in one week for a $1.50 premium.
Rolling Action: Buy back the call, then sell a new one at a $110 strike expiring in three weeks for a $2 premium.
This adjustment:
Raises the strike price to $110, allowing more upside.
Generates an additional $2 premium, increasing your income.
Why Roll Options? 🤔
Rolling offers a great way to stay adaptable. Here’s why it’s so valuable:
Risk Management: Rolling can help avoid assignment on in-the-money positions.
Income Enhancement: Every roll brings a new premium, boosting your potential returns.
Stay in the Trade: Rolling lets you keep a position if you believe in the stock’s future performance and want to make adjustments.
My Take 💡
Rolling CSPs and CCs is a strategy to use to adapt your positions to changing markets. It is more practical to use for weekly options where you have a greater risk of assigment than monthly. Since I tend to use around a 30 DTE and only sell CSPs on stocks I’m comfortable owning, so I do not roll CSPs often. If I do get assigned, it simply gives me more options—like selling covered calls on the shares or repositioning them. I do use the strategy more with covered calls to generate more premium along the way.
I hope this guide has given you a solid understanding of rolling and when it makes sense to use it! Let me know your thoughts or questions in the comments. Here’s to keeping the trades rolling smoothly!
Until next time, keep those trades moving and your strategies sharp!
Trade Smarter -EC 🎯
*Disclaimer The information in The Options Oracle is my opinion, not financial advice.
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