Rolling is what happens to options positions after they expire without an exit signal on the stock. It's how I keep my hedged/leveraged positions alive. I almost always structure them as short vertical spreads -- bull put spread or bear call spreads -- that expire within 20 to 40 days of entry.
I've updated my Trading Rules with a section on Rolls. It's near the end. The Rules, as a Google doc, can be read here.
The new section says:
A hedged position consisting of options (such as short vertical spreads) may be rolled into a new positions upon the profitable expiration of an old one if the stock price is trading beyond the 20-day price channel boundary as it was at expiration (the 20-day expiration channel). All units held in the old position may be rolled into the new one in a single order.
If the stock is trading within the expiration channel, then the roll must be delayed until the price breaks anew beyond the expiration channel. All units can be rolled upon the break beyond the 20-day expiration channel, no matter how long the delay has been.
If during the delay the price moves beyond the 10-day expiration channel, an exit signal is given and the position may not be rolled. Instead, the symbol can be traded again only upon the occurrence of a new entry signal according to the rules given in this document.The difference in the two cases is whether an exit signal has occurred. With an exit signal, all units can be rolled forward immediately. Without a signal, then everything is reset and any further breakout results in a new position opened at one unit.
I opened a position in SBUX yesterday. My vertical spread position expired profitably on May 17, but the price declined and didn't close above the 20-day price channel at that time. It subsequently dropped and on June 5 closed below the 10-day price channel, generating an exit signal. The breakout above the 20-day price channel on June 7 meant that I entered SBUX as a new position, at one unit. My entry write-up can be read here.
I opened a position in QIHU today. Like SBUX, my QIHU vertical spread position expired profitably in May, and the price dropped. However, in QIHU's case, the stock continued to trade within the 10-day price channel. It never dropped below the lower boundary. So when it broke above the 20-day price channel at the time of the May expiration, then I entered by opening a July options position consisting of four units, the number I had held in May. It's a roll with a gap of three weeks (plus change) that entirely skipped over the June options. (April's entry write-up on QIHU is here.)
Hedged positions introduce a degree of complexity unknown to the original group of Turtle traders, the people who in the 1980s implemented the strategy that forms the basis of my own trading rules. (The original rules can be read here. They were formulated by the Chicago commodities trader Richard Denis.)
Yet complexity, as long as the trader follows a set of rules that cover the universe of possible occurrences, is no barrier to profit.
My trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.
Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.