Rolling a trade is one way to manage a winning or losing position. To roll a trade, we simultaneously close our existing position and open a new one. We can change the strike, duration, or both. At tastytrade, we look at rolling as a defensive tactic and roll for duration to “keep the dream alive”. We will only roll if our assumption is still the same. If our assumption has changed, we look to close our position or leave defined risk spreads open and let the probabilities play out. Knowing when to roll a trade can be subjective, but we look at a few different aspects of the trade to help us decide.
If our probability of profit is less than 33% or if the trade has gone past one to two times our profit target, we will look to roll for duration. We do not double our risk by doubling our contracts, we simply roll for duration and a small credit. We like to roll for a credit because it adds to our original profit potential and extends our breakeven price.
In most cases, we do not look to roll defined risk trades. When we enter the trade we are comfortable with the max loss that can occur and allow the probabilities to play out. However, if we are “on the dance floor” and our short strike is slightly ITM or ATM and our long strike is OTM, we may roll for duration. Our studies show that if our assumption is the same and the underlying is cyclical, we can roll perpetually until we are right and turn a profit consistently.
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