Rolling, rolling, rolling

When selling options, you have a certain assumption. That assumption can be wrong. You then might have to honour you obligation under the contract. There is one action extra you can take: roll the option.

Here is the story of one of my rolls. I have been rolling quite some time already and I might need to roll still a few more times.

The story

During the summer of 2016, I was assuming a serious market correction was already overdue. So, selling puts on gold sounded the reasonable thing to do. Very often, when the market goes down, gold and goldminers go up! And we all know, there was no correction.

During that time, I sold puts withs strike 27 and 25. As a result, I have a few puts that are In-The-Money. This means, that I can be assigned stock at the strike price. That price is below the current market price.

rolling

As it is my system to sell puts to get the premium and avoiding assignment at all times, I now have a problem. One basic rule is that I do not mind the assignment. that however does not mean I have to like it.

The resolution

Rather than waiting assignment, I decided to roll the option. What is that?

It means that I buy back the option in the market (Buy-to-close) at the current price. As the option is in-the-money, this will cost way more than when I originally sold the option out-of-the money. I now have a temporary loss.

As a next step, I sell another option (Sell-to-open) on the same stock, with a further away maturity. I also try to change the strike price in my favour. This is not always possible. The end goal is to get a little money while keeping the dream alive.

Here is an example:

On August 26, I sold-to-open a 25 put for a premium (after fees) of 0,59$ with maturity in October. I got thus 59$ deposited on my account.

The stock went way below, so I needed to roll. On 17 October, I did a fist roll. I buy-to-close the option for 170$ and I sell-to-open another one with later maturity for 220$. This means I get another 50$. So, I now have 109$ in premium collected

The stock did not recover, so, another series of rolls followed:

385+390 adds 5$ , then 375+392 that adds 17$ and then 488+507 that adds 19$. In total, I now have collected 150$ in premium. That means my break even is now 25$-1,5$ = 23,5$. I actually have a change to close this position with a profit. The profit will not with a high return, compared to normal trades that go as assumed. At least, it will not be a loss.

Then, there is the orange line. That is my 27 put. Here, I have collected in total 95$ premium, and still no view on profit in this trade. The deeper in the money a trade is, the more difficult it is to roll.

Please note that other people will rather close the trade in an early stage at a smaller loss. That is one way to trade as well.

An example where I was assigned

On the same stock, I got assigned stock with another 28 put. That meant I had to buy at 28$, increasing my average buying price with a lot. To counter this, I am now selling calls against my stock, above my average buying price.

Any long standing rolls that you have?

 

 

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14 thoughts on “Rolling, rolling, rolling

  1. I only played with options of stock where I really did not mind being assigned the stock. I preferred boring stocks with very predictable profits. In general volatility in these stocks is also a bit lower which does impact the premium received but it should avoid being stuck with a stock or a roll-over position for a long time. As I mentioned to cheesy finance: Ahold was wonderfull between 2011 and 2014, coca cola also was a lot of fun: 15% profit on 11 months: half was because the stock went higher but the other half was dividends and option premiums. The up side of going for stable, reliable stocks is you feel more certain to pump more money into it. If I had 80.000 euro now I would write a put to be assigned GBL stock at strike 80. Normally this tock would get you around 3% in dividends and around 5% in appreciation on average year after year. That is 8% return. And then I would try to get another 2% tot 4% with out of the money calls where I rather would not be assigned. This would push your return to 10% a 12% with close to zero down risk and a maximum of 4 times writing a call contract during the year. This actually generates 5% (4.000 euro) to 7% (5.600 euro) of cash each year. In the build up phase you use that cash to write puts on another stock (coca cola or ahold or abinbev for instance) until assigned and then you switch to out of the money calls again. You only need around 3 or 4 stock like this, which you really, really know well and a 300.000 euro portfolio (generating 15.000 to 21.000 euro in cash) to go the semi retired route and reduce your work time to 3 a 5 months ….

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    1. I like the plan… I tend to take some more risky plays with my put selling. I try to stick to the rule that I do not mind assignment. Medium term, I am still bullish gold and goldminers. There is too much trouble under water…
      I added money to my options account and started to sell options against some solid companies that are GBL/AH/KO like… I will still try to avoid assignment.

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    2. Did some analysis and sold a put. The numbers today are the following: net dividend yield of 2,5 at current price.

      The appreciation long term is not that positive due to the fact that the stock did not yet recover from the 2008 crash. It is barely ate the same level. The 10 year total return is quite low. gbl.be quotes only 2,58 TR on 10 years and a nice 11,7 on 5 years

      Why did I do the trade: I like the 2,5 net yield, the growing dividend and the fact that I have 0,795 yield in 35 days from the premium. That is 8 times more than on my savings account.

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  2. Nice writeup! Actually I have more than 3000 euro blocked in “rolls” so I am an heavy user of this medicine, so to speak. As you wrote correctly the trick is to try to roll for profit, or manage the trade to do so. Options under this point of view are great because they allow you to turn a trade in positive even if the stock is tumbling.
    Ciao ciao
    Stal

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  3. Thanks for sharing. I have considered rolling in the past but never used it as it was too expensive for me with my previous broker. Now that I have a better one, I have this as part of my toolkit.

    Best
    R2R

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  4. I’m a BIG fan of rolling…rolling….rolling. If I’m at risk of being assigned a put, I’ll typically roll it ~2 weeks prior to expiry, usually out another 2-3 months. If I can continue to earn option premia by rolling, seems a better move than buying the stock at above market and sitting on it, earning nothing but dividend. Usually, most stocks that I roll are eventually “above water”, and the option expires worthless. LOVE it when that happens!! (Funny, I’m also rolling some Gold stuff, nice to see gold prices picking back up…expect some of my rolls will now expire worthless).

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  5. Great article on rolling. I’m working on a similar article on my methodology for rolling a put as well. Interestingly I had something happen a couple days ago that I had not experienced before…an early assignment. I had sold a call on AAPL expiring at the end of the month at a strike price 2.5% above market. This was right before earnings and subsequently the stock shot up to 131 (strike was 125). I was going to let it ride for a bit, but rolling at such a deep in the money level would have been expensive. I was surprised that my shares got called away from me well before the expiration. I guess someone really wanted to collect that upcoming dividend!

    Scott

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    1. Thanks for sharing. There will always be people that exercise early. That is something we have to live with. Till now, I was able to roll all but one item call. I now have one that is already deep ITM, so I expect a call as well.

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