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.
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.
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.
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?