Rolling options is a powerful tool in a trader’s arsenal, allowing for trade adjustments to manage risk, extend duration, or optimize profits.
However, many traders make critical errors when rolling options that can turn a good adjustment into a costly mistake.
Below are the biggest pitfalls traders encounter when rolling options and how to avoid them.
Contents
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- 1. Rolling Without A Clear Plan
- 2. Paying Too Much For The Roll
- 3. Rolling Into an Unfavorable Risk-Reward Setup
- 4. Ignoring Market Conditions And Volatility
- 5. Rolling Just To Avoid Taking A Loss
- 6. Rolling Without Considering Assignment Risk
- 7. Not Adjusting Position Size When Necessary
- 8. Rolling For A Credit Without Considering Risk
- 9. Ignoring Liquidity And Bid-Ask Spreads
- 10. Failing To Reassess The Trade Post-Roll
- Conclusion
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1. Rolling Without A Clear Plan
One of the most common mistakes traders make is rolling options reactively rather than strategically.
Many traders panic when a trade moves against them and roll without considering their long-term plan.
Rolling should be based on a well-defined strategy, considering factors like market conditions, implied volatility, and the trader’s risk tolerance.
How to Avoid It: Always have predefined criteria for when and why you roll a position. Whether you are extending duration, avoiding assignment, or reducing risk, ensure that your roll aligns with your broader strategy.
2. Paying Too Much For The Roll
A frequent misstep is rolling at a poor price, often paying too much in extrinsic value to extend the trade.
This can erode potential profits and increase the capital at risk.
How to Avoid It: Use limit orders instead of market orders and evaluate the roll’s cost relative to the remaining value in the original position. Consider alternative strikes or expirations that offer better risk-reward dynamics.
3. Rolling Into An Unfavorable Risk-Reward Setup
Traders sometimes roll to a new strike price with an unfavorable risk-reward profile.
For example, rolling a short put to a much lower strike may reduce the premium collected but expose you to greater downside risk without adequate compensation.
How to Avoid It: Assess the new trade’s risk-reward ratio before rolling. Ensure that the adjusted position still fits your strategy and offers a favorable probability of success.
4. Ignoring Market Conditions And Volatility
Market volatility plays a crucial role in determining whether rolling an option is a good idea.
Many traders roll without considering shifts in implied volatility (IV), which can lead to unfavorable trade adjustments.
How to Avoid It: Before rolling, assess IV levels and how they compare to historical norms. You might be better off rolling into a credit if the IV is elevated. If IV is low, consider waiting for better conditions or adjusting strikes accordingly.
5. Rolling Just To Avoid Taking A Loss
Rolling should not be used as an emotional reaction to avoid realizing a loss.
Some traders continuously roll losing positions, hoping the trade will eventually work out, leading to capital drain over time.
How to Avoid It: Set predefined loss thresholds. If a trade reaches your stop-loss point, accept the loss and move on rather than blindly rolling the position forward.
6. Rolling Without Considering Assignment Risk
For traders rolling short options, especially in covered call or cash-secured put strategies, failing to account for early assignment risk can be costly.
Assignment risk increases if an option is deep in the money and carries little extrinsic value.
How to Avoid It: Monitor the extrinsic value of your short options. If the extrinsic value is near zero, be prepared for a possible assignment and plan accordingly.
7. Not Adjusting Position Size When Necessary
Traders often roll a position without considering if they should reduce or increase their contract size.
Keeping the same position size in a less favorable market environment can amplify risk.
How to Avoid It: If market conditions have changed, adjust your contract size accordingly to align with your risk tolerance and new market expectations.
8. Rolling For A Credit Without Considering Risk
Some traders chase credits aggressively when rolling, assuming that collecting more premium is always beneficial.
However, this can lead to overly risky adjustments that expose traders to large directional moves or significant downside risk.
How to Avoid It: Balance the premium collected with the potential risk of the adjusted trade. Ensure that the new position still aligns with your overall risk management strategy.
9. Ignoring Liquidity And Bid-Ask Spreads
Rolling into options with poor liquidity can lead to significant slippage, making adjustments more expensive than expected.
How to Avoid It: Stick to liquid options with tight bid-ask spreads. Avoid rolling into contracts with wide spreads or low open interest, as these can result in unfavorable fills.
10. Failing To Reassess The Trade Post-Roll
Many traders execute a roll and then stop actively managing the new position.
However, the new trade needs ongoing monitoring and potential adjustments like the original position.
How to Avoid It: Continue to evaluate the rolled position with the same diligence as the original trade. Set new exit points and reassess market conditions frequently.
Conclusion
Rolling options can be an effective way to manage trades, but only if done with careful consideration.
Avoiding these common mistakes will help traders execute rolls more effectively and maintain a disciplined approach to options trading.
Before making any roll, ask yourself whether the new position aligns with your strategy, improves your risk-reward profile, and fits the current market environment.
We hope you enjoyed this article on the biggest mistakes when rolling options.
If you have any questions, send an email or leave a comment below.
Trade safe!
Disclaimer: The information above is for educational purposes only and should not be treated as investment advice. The strategy presented would not be suitable for investors who are not familiar with exchange traded options. Any readers interested in this strategy should do their own research and seek advice from a licensed financial adviser.
