Rolling options contracts forward is a key risk management tactic in options trading. Rolling can help you lock in profits on a successful trade, while reducing downside risk and keeping some further upside potential.
To roll options forward, you must have a plan for handling positions before you enter them, and today, I'm going to give you my process in this video:
What Does Rolling an Options Contract Forward Mean?
Rolling an option means closing a current contract and buying another contract with a higher (for call options) or lower (for put options) strike price on the same stock.
The new contract will cost less than the previous one, lowering total money at risk in the trade
This is done when the stock (or the options contract) has moved in your favor, and you want to lock in a profit.
So essentially, you are swapping for a new, less expensive option.
Rolling Options Works Best With Swing Trading Options
Swing trades tend to have a longer-term profile, develop more slowly, and usually allow you to work into/out of a bigger position. This is why rolling works best with swing trades.
Day trades are very short-term, so the goal is to have close targets, tight stops, and be more aggressive in taking risk off. So it's more of an "in or out" mentality.
Event trading is typically more boom or bust -- stocks tend to have huge swings around events, and there is not always a chance to scale back risk post-event
You can roll contracts with day and event-based trading -- it's just not easy, and you have to be fast.
First Order Of Business - Setting Targets
Before entering a trade, I like to have at least 2 targets and a stop range.
The first target is relatively achievable.
The second target can be more aggressive.
I set targets/stops using technical levels or profit percentage levels.
Technical levels include: moving averages, key support/resistance, or extension levels from current prices (5%/10%/20% etc.).
Profit percentage levels are net gains on the position. For examlpe, if you bought a call for $1 and you were targeting a 50% gain, you would look to sell the call around $1.50
This Is How I Roll
Once a stock hits my first target, my main goal is to lock in money and cut risk.
This is what I generally do:
Close the current contract and buy a higher (if calls) strike contract that is less than the debit I paid for the original position
Buy a contract that has another week/month of time to expiration vs. the original.
A Rolling Options Case Study With KHC
With KHC, my trade went like this:
Step 1: Bought Oct $27.50 call for $0.50
Step 2: Sold the Oct 27.50 call for $1.75 (locking in $1.25 of profit)
Step 3: Bought the October $30 call for 40 cents
So even if the roll expired worthless, I would still expire with a profit. And if the roll happened to take off, I'd still have more upside potential.
Makes sure you watch the video for the full breakdown!
