When To Roll, Hold, or Close Your Options Positions

ready rolls are hold or closed this is expiration week we felt it's important to cover this topic let's do it so because so many people have questions with respect to do your role a position do you hold the position to close position so why do we roll trades as expiration approaches will roll to extend duration when our assumption of the underlying has not changed from when the trade was initially placed the increased duration allows us to increase our probability of success and reduce our risk by managing winners this is due to marketplaces of locality hey you know what over the course of a month you've there's a couple stocks like last week for example that I had crappy positions in on the down move they all turned into good positions but I didn't take them off it's not a crap again correct something like yeah yeah I've got down about $32 we had some short trades going right there we needed just under 32 bucks now sire yeah I mean there's a couple of them Facebook got down to under 46 now was back to 48 or 49 so there are different situations where you know what I got bailed out on Apple last time some of them we took off like I bailed out and Netflix took it off got bailed out an Apple took it off I mean there are times when we take some off there are other times when we don't I guess the reason we roll is to keep trades that we want to have on in play and wait again for that durational aspect to kick in yeah that's all this so that's the reason for rolling do we roll trades that we don't care about anymore pretty rare mm-hmm we much prefer to roll trades that are kind of that we do to us let's go next slide what are the ways to determine whether a roll close or hold well first of all and most important has your assumption changed like a lot of times a lot of times it's not so much by market assumption that'll change so much but there are times I just want to deal with a certain stock anymore I'm done with that stock and there are other times that I'm like okay you know what I'll keep this position on one more cycle sure is your trade on the dance floor it is your trade like are you close if you're close you want to roll just because you're close and because the statistical chance if you're caused by rolling you're giving yourself more time to be right if you're long or short a stock at $50 XYZ is training for fifth dollars and 51 or 49 are your perfect numbers that you actually make some money on and you're trading at 50 and you want to say I'm gonna hold this stock for the next I'm gonna wait for the next 30 days until it trades 49 or 51 there's almost a hundred percent chance that it's gonna do that so you take that shot and you roll that position that's we call it by on the dance floor how much how much extrinsic value is left well this morning I started going through some of my positions and there was no extrinsic premium left in some of my in some of the short calls I have on so I have two roles positions crush those basically just like stacking that's not the reason that you put on desperation so today I have to roll some positions to November so I can pick up some additional premium because the only reason you roll is to to give yourself time but also to collect premium in the process correct how much would you I'm sorry would you would you make the new roll trade if you had no position on and this is something that I'm very mixed on there's a lot of times when I look at a position like I'll give you an example right now of positions I have on like your answers gonna be no well I don't know like for example right now I have a position on in in a tie G Pentagon since earnings a less cycle I'm short stock and I should say Co before but right well whatever two cycles so I've been selling premium in there two cycles would I make the new the same trade and AIG right now probably not correct okay but I'm short stock and I'm short the October 49 puts I'm gonna roll the October 49 puts to the November 49 puts this morning wherever that's taught wherever that's sloping on November for a second so November 49 puts are trading for 104 and the outputs are training for 21 cents I'll probably roll that trade for about 82 or 83 cents I'm sorry maybe I'll get a little more ducks down yeah so maybe I can roll that trade for 87 or 88 cents this morning I'm gonna roll that trade pick up another 88 cents on on however many contracts I have is that a trade that I would open today short stock and short puts in AIG ah I probably don't care about it but I really don't care about AIG enough to make that trade but I have it on already and I'm gonna try to get another 83 cents out of that trade this month I need to or a little bit more of the stock cooperates and goes below correct 9 then you'll be the trade correct so I need to make some more I want to make some money more some more money back on that trade I've been slowly nibbling away at the loss in there so would I make the new trade if I didn't have the position I'd probably not but I'm still gonna make that role because I'm quote on the dance floor and my assumption on Ag hasn't changed I think it's still going down how much extrinsic premium is left only twenty two cents that's why I'm rolling into November very good let's go next slide any other factors to consider well time remaining relative to profits made and the ratio of return on capital we talk about that all the time but the simple part there is you know I would leave this trade on for a couple of more days if I had more premium I'm looking for a position I have on right now where there's I'll give you one like in blackberry for example which is BB ry I have position on where I'm short the eight calls I'm short the nine calls in short the eleven puts that is a perfect example of I'm not gonna roll the trade I'm I'm gonna hold the trade this week for as long as I can and hope the stock bounces up just a little bit and then there's not really much more I can make in there and then I'm gonna close the trade you want the stock to close somewhere between 8 and 11 you'll be taken out right yeah I mean it trades over at the end of this week but I'm not rolling it and I'm just holding it to squeeze out the last few pennies in there and when it's over it's over I'm done with Blackberry correct so that's a sad an error and that's the end of their they win but that's that's an example of a trade that I am prepared to close ok let's go to the next one next one do we roll roll close or hold if the trade is at the money well if your trade is at the money you may look to roll out of the trade in time to gain duration and again when you gain duration you reduce your directional risk in the trade and you add probability profit that's all this reduce directional risk and profitability profit because ultimately you're taking extending your durational risk as well you're extending your tail risk hmm so anytime you extend your tail risk you essentially increase your probability profit and you just said you know you give yourself more time to be right but in the process of doing that you extend your outside tail risk and there's nothing you can do about that that's the trade-off question to ask our do you keep the same strikes different strikes or decrease or increase risk and I'm looking at kind of an example of a trade I have on where I'm short we find a perfect one of the underlyings I have a position on right now is for example ewz which is ewc is the Brazilian gzf and I'm short some in the money calls the 44 line and I'm short some out of the money puts the 47 line this is a perfect example of a trade that I have to roll this morning again I'm short the 44 calls and the 47 half putts so you basically short stock at the 40 yes this is an underlying that I want to keep my short position okay because I my assumption hasn't changed but by 47 1/2 puts in in October have no premium left so I'm going to have to do two things here I'm going to have to change the strike different strikes and decrease the position risk so I'm gonna keep the 44 calls because we don't touch those and I'm gonna roll up to something like the 48 49 or 50 calls I'm sorry boxes 49 and a half I'm gonna roll up like the 50 puts I'm gonna have an inverted strangle on so I'm rolling the position I'm keeping the dream alive but I'm also adjusting strikes sure would you would you roll the the calls also take them out of that course okay of course you said am I gonna do anything to the calls no no I'm not gonna change the strike on the calls but I'm gonna roll both to November now here just go back to the page for a second just to trade page let's just think about what that does right now I have no premium on the short 44 calls and I have very little premium on the 47 and a half puts but that's in October yeah if you go to November right now scope it on November so if I go to November and I roll the 44 put the 44 calls I'm gonna pick up 20 cents but if I roll the 50s I'm gonna pick up the equivalent about a buck 30 so net I'm gonna pick up a buck 50 in premium now how's that what's that gonna mean matte mean for next month well I don't know it's gonna it's gonna change my basis by about a buck 50 that's exactly what it means I don't know well given the number of spreads I have on ultimately in the end that dollar 50 if I may to collect it is gonna take me from slightly negative society positive here okay do we roll close or whole debit spreads when in the money or out of the money for a debit spread in the money we look to close the trade I mean listen if we're out money we're gonna close the trade even though it's a high probability trade if the spreads out of the money and there's a little left to lose we've been keep it as a lottery ticket or just play reversion to me we rarely will roll those traits debit spreads an example of that for me is I have a position on an FX see where I have the October I'm 130 to 134 put spread the stock is currently trading at just closed just over 134 now that's an example of an at the money put spread and in this case it's slightly now at this morning with the rally in there went slightly out of the money I'm just going to UM for me I'm gonna do nothing maybe eat it right I'm gonna eat it I'm gonna hope I'm gonna treat us a lot of our days and I'm not gonna roll that position if I was gonna roll it I would change the strikes correct you don't expect anything from it okay I just want to give you real examples of positions I have on that that you know we're all these are consideration let's go next slide do we roll a trade if it's at the money well if your trade is at the money you may look to roll the trade out in time to gain duration for the trade increasing probability of profit questions to ask are do you keep the same strikes different crisis strikes or increase or decrease risk or we're kind of saying the same thing on every single slide and I know it sounds repetitive but this is the kind of week where we need to just have this discussion because you have to get where you don't overthink this stuff like I'm not gonna spend I'm just mechanical yeah I'm not gonna spend more than twelve seconds on FH one of these decisions that's right because that's where we start to drive ourselves crazy you know I'm not gonna worry about AIG I'm not gonna worry about FX see and let me tell you if you have limited capital I may think of things differently to correct just remember where we were a couple days ago and this is a good point because you don't talk about that a lot of times you know if you have a limited capital you are gonna think about different well I'm not gonna throw good money after bad as much as I may if I think the position is small enough and I can buy more time yeah it's like you know on a professional level I will tell you something on a professional level most pros are reluctant to roll positions most pearls pros will take their take their lumps and move on because they find a clean slate to be more effective I find as a retail customer it's not nearly as cost-effective to do that so if there's an opportunity to salvage the trade and because it just costs a lot of money to put trades on it to take trades off as a professional I would just blow everything out as a retail customer I'm more likely to hold the trade correct okay let's go left side so again do we roll close rolled roll hold or close the trade if it is at the money and same thing as we just same thing that we just talked about just a second ago I mean the exact same outline kind of thing is the same slide yes okay and I can't harp on I can't really get into this I can't say it enough times you know you look at your overall portfolio one of the things I did this morning this is kind of a little sicko move it's about 4:30 this morning and I'd finally caught up with my emails and I went through every single underlying a hat and as I'm going through each underlying I was kind of like wow I wish I had more time I wish I had more time my life to kind of stay on top of this I think one of the things that that's hurt us in 2013 Tony is that we haven't spent enough time on this very simple topic of role hold or close we take a lot of stuff for granted because we're doing the show and we probably aren't as mechanicals we need to be about rolling about rolling let's put it that way I think there are certain situations where we let the premium laughs a little bit and we need to be more diligent well one of the notes I made to myself for 2014 is be more mechanical be more mechanical because you kept saying it to us ourselves this year but I don't think we did a great a good enough job being aggressively rolling okay we've also had a one-way market - that's the other problem okay that's the other problem I mean it's easy to say in hindsight when you have a one-way market hey we should have been more if you have a market that's two-sided you're like you should have waited there were more cyclical market then that's right you're waiting that's right hey and that's what we play okay

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Id: BTT7NLB4VKY

Length: 13min 30sec (810 seconds)

Published: Mon Oct 14 2013