It want to start this discussion with a bit of my background. I started trading options in May of 1974, when I became a member of the CBOE. When I started, listed options were in their “pilot program.” Looking back, it’s amazing to think of the few with vision that saw the incredible value of exchange listed options. At that time, there were only “call” options, the right to buy a stock at a specific price, by a specific date. So our strategies were all buying or selling calls, spreading or trading against the underlying stock. It was quite limited. Once “puts” were listed, the right to sell a stock at a specific price, by a specific date, strategic approaches multiplied. In the 43 years, with the advent of computer-driven analysis of option metrics, the number of strategies and trading styles is seemingly infinite.
One of the most common approaches to trading options is to have positions on that benefit from option decay. In that style, traders are always short options, either naked (uncovered) or with defined risk. They use option metrics to indicate to them the risk/reward situation of each trade. When a trade is correct, they take the profit. When a trade goes wrong, and they are losing money, many use the approach or “Rolling.” That means closing the original trade, with a loss, and reinitiating it with a longer-dated option. Essentially, they buy more time. Than can work, in fact, it often does. However, if a trader has many positions on that are similar, the market momentum can cause big trouble for the traders overall portfolio. That can cause long slumps as problems multiply and emotions run high.
In the video below, we look at “Changing the Mindset” on options rolling. We give three rules that will help a lot! It is valuable for option traders of all levels, even if you are just thinking of starting in this fascinating approach to trading and investing.
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