The art of Roll: Sell Put What to do before the right is exercised

Reading time: 10 minutes

What is Roll

Roll = close the current contract and open a new contract.

You sold Put, but the market trend is not what you want, and you don’t want the option to be exercised. Push the time or price to where you want with Roll.

Three types of Roll:

Roll Out (exhibition period)

Operation: Buy to close the Put of the current month, and sell the same price of the further month Put at the same time.

When to use:

The underlying price is close to the exercise price, but you don’t think it will continue to fall.
It takes more time to "consume" positive returns
I want to collect another royalty to compensate for the loss.

example:

Current: Holding AAPL $180 Put (expires June 20), stock price $182

Operation: Buy to close 6 months $180 Put (pay $1.50)

Sell opening July $180 Put (closed $2.80)

Result: Net $1.30 extra royalty, an extra month

Risk: If it continues to fall, you will still be exercised and locked in for a longer period of time

Roll Down (price reduction)

Operation: Buy to close the current Put, and sell the Put with a lower exercise price.

When to use:

The target has fallen, and you expect it to rebound
Reduce the risk of exercise (the new exercise price is lower and farther from the current price)
Accept some small losses in exchange for safer positions

example:

Currently: Holding AAPL $180 Put, the stock price has dropped to $175 (the virtual value has turned into a real value)

Operation: Buy to close position $180 Put (pay $6.00)

Sell opening $170 Put (closed $2.50)

Result: Net loss of $3.50 (Roll cost) but the new exercise price of $170 is safer, and a new premium of $2.50 was collected

Risk: If it continues to fall, the option may still be exercised, but the price will be lower

Roll Up (price increase)

Operation: Buy to close the current Put, and sell the Put with a higher exercise price.

When to use:

The underlying price has increased a lot, and the current Put is already very safe (deep out-of-value)
Want to "upgrade" to a higher exercise price and receive more premiums?
The premise is that you are willing to take over the shares at a higher price

example:

Currently: Holding AAPL $180 Put, the stock price has risen to $200 (deep out-of-value)

Operation: Buy to close position $180 Put (pay $0.10)

Sell Open Position $195 Put (Close $2.00)

Result: Net $1.90 in additional royalties

But the stock price went from $180 to $195 (would you?)

Combo Roll: Out + Down

In actual operation, they are often used in combination: both extension and price reduction.

Current: Hold AAPL $180 Put (June), share price $178

Operation: Buy to close 6 months $180 Put (pay $4.00)

Sell opening July $175 Put (closed $3.50)

Result: Net loss of $0.50 (Roll cost) plus one month + exercise price dropped by $5

Roll decision tree

Your Sell Put is about to expire, what now?

1. The stock price is above the exercise price (virtual value), and there is still enough time → Hold until expiration and earn the premium in vain

2 Want to earn more → Roll Up (increase the price to a higher exercise price) │ ├

3. The stock price is near the exercise price and you think it will not fall. Roll Out (extension, gain time)

4. Do you think it will continue to fall? Roll Down (lower prices, reduce risks)

5. If the stock price is below the exercise price (real value), you are willing to take over the stock. Do nothing and wait for the exercise of power.

If you don’t want to take over the shares, Roll Down + Out (price reduction and rollover). If you are afraid, buy to close.

Roll's cost awareness

Each Roll has a cost:

Bid-ask spread (Bid-Ask Spread)
Commission (two trades: closing + opening)
loss of time value

Roll is not free. If the Roll cost is too high, it is better to close the position and admit a loss.

⚠️ Risk warning: Roll can postpone the problem, but it cannot solve it. If the underlying price continues to fall, repeated rolls will only accumulate losses. Stop loss when it is time to stop loss.