Best Practices

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Defending Trades Gone Bad - Rolling

Best Practices

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

Our studies have demonstrated the importance of managing winners when positions go our way. It’s also important to know when and how to roll positions when they go wrong. Offense is important but you can’t neglect your defense. We provide defense mechanisms for Strangles, Iron Condors (both “traditional” and “wide wing”), Straddles and Calendar Spreads.

A graphic showing how to defend a Strangle in which your position was tested on the Call or Put side was displayed. The graphic showed that we roll the untested side (up or down) to the new 30 Delta Call or Put using the same expiration month. We then remove both positions when position reaches 50% of the initial credit received or roll out to the next month’s expiration to extend duration.

Tom noted, “You're chasing by adjusting strikes and tweaking the Delta without adding any more capital to the trade. If that doesn't work we roll horizontally to the next month to reduce your Delta and extend Duration, If that doesn't work we again roll the untested side (up or down) to the at-the-money (ATM) strike or if need be go inverted.”

A graphic showing how to defend a normal Iron Condor was displayed. Iron Condors are defined risk trades so we generally do not manage the positions and let the probabilities play out. An alternative to try to defend this trade is to take off the long options (wings) near expiration and roll the short strikes to a further month using the same strategy as a Strangle (see below).

A graphic showing how to defend a Wide/Dynamic Iron Condor was displayed. Although these are “defined risk” trades the long options or wings are generally far away and it acts more like an undefined risk trade. We can defend the trade by rolling the untested short side to a 30 to 50 delta. If little time (or extrinsic value) is remaining we will roll the position to the next expiration cycle.

A graphic showing how to defend a short Straddle was displayed. When trading a Straddle we start to defend when our breakeven prices are tested. We defend it by going inverted on the position by rolling the untested call down (or untested put up) to the (new) 30 to 50 delta strike and roll the entire position out to the next expiration to allow more time to be right. Positions are then managed at 50% of the initial credit received.

A final graphic showing how to defend a Calendar Spread was displayed. The graphic showed that if we have two months between the short and back month options, we will generally roll the short option to the next month to gain more credit and allow more time which provides more time for our position to be right. If the Calendar spread is in two subsequent months we generally will not manage the position but instead close the position if the odds are no longer in our favor.

Watch this segment of Best Practices with Tom Sosnoff and Tony Battista for a detailed explanation on how to defend trades that go against us.

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