I want to extend Dan Passarelli’s March 13, 2011 comments in this space.
“Finality. Finally, after expiration options come ‘off your sheets’. They are either exercised (or assigned) or they expire. Either way, your winners are winners and your losers are losers. The trade is over.”
This concept is difficult for many traders to understand. Sure, they are very happy to take their wins, but it is much more difficult to accept the fact that some trades are losers. Not only do they not accept the ‘fact’ that the trade has been closed, but they take steps to convince themselves that it ‘ain’t over ‘til the fat lady sings.’
How do they do that? Simple. They roll the position.
Rolling is a technique in which the original position is closed and a new position is opened. The trades are made simultaneously. The newly opened trade is on the same underlying asset – giving the illusion that the trade is still alive. However, the expiration month has been moved – again providing an illusion that the trade still lives. In the vast majority of cases, the new position consists of options that are farther out of the money than the position just closed.
Now the trader thinks:
- Expiration doesn’t matter because I strategically adjusted the original trade
- I have more time for this trade to work
- It’s the same money, the same underlying asset, and thus, it’s still the original trade in a slightly different format.
Don’t misunderstand. Rolling can be an effective way to handle a risky position, although I believe it is used far too often by traders who will not accept that the original trade is finished and the newly rolled position is an entirely new trade. By new, I state clearly: The new position has nothing to do with the original. It is a brand new trade, and should have been made only because this is a position that the trader believes will be profitable. It should never be: this is the best I could do because I had to roll the original trade. You never have to roll. Most of the time, it is better to accept the loss and move on to the next trade.
That: ‘I had to roll’ mentality is something that must be overcome for a trader to have any chance to succeed in this business. Opening a poor trade with the intention of recovering a loss from an already closed trade is not intelligent.
Rolling has its uses, but not as the go-to strategy of choice. Accept the fact: When expiration arrives, your position is over. If you keep records, write this trade into the books.
The song is being sung. Loudly.