Earnings season: Share your trading tales!

Views 118K Contents 377

[Options ABC] Options Rollover: Balancing Risk and Reward in the Volatility of Earnings Season

Moo Options Explorer joined discussion · Apr 21 22:42

Hello everyone and welcome back to moomoo. I'm options explorer.

In today's [Options ABC], I want to share with you a risk management technique for trading options during earnings season: Options Rollover.

First, let's start by answering a question to see what your choice would be:

Some investors might choose to close their options positions to stop the loss in time.

Others might opt to wait until expiration, hoping for a market turnaround, but often this leads to the options becoming worthless.

Then there are those who would choose options rollover, adjusting the contract to reduce the risks they're facing.

So, what exactly is options rollover?

Let's dive deeper and explore it together in the following discussion.

If you wish to start learning about options, please click here to learn more.

[Options ABC] Options Rollover: Balancing Risk and Reward in the Volatility of Earnings Season

I. What is options rollover?

When you roll over options, you close your current option and open a new one , realizing any gains or losses.

This move can help you cut down on risks or aim for higher profits.

To roll options, here’s what you do in the app:

Go to the Accounts tab.

Select the options position you'd like to roll and tap Roll.

Select the leg(s) you'd like to roll and tap Trade.

This feature offers several potential advantages:

Simple Roll Over: You can sell your current option and buy a new one in just one click.

Flexibility: You have the freedom to roll over just one part of an option, a few parts, or the whole thing.

Better Prices: Doing both the sell and buy steps at once can help you avoid price changes that might happen if you did them separately.

Less Price Risk: The app's automatic process helps protect you from sudden price swings.

There are three main ways to roll over options:

Rolling Up: This means you close your current option and then open a new one with the same expiration, but with a higher strike price.

Rolling Down: Here, you close your current option and open a new one with the same expiration, but with a lower strike price.

Rolling Out: In this case, you close your current option and open another one with the same strike price, but with a further-out expiration date.

Each way of rolling over is used in different situations and for different reasons.

For example, if you're an option seller in a losing position, rolling over can help manage your risk. If you're an option buyer in a winning position, rolling over might help you keep your profitable stance. Let's take a closer look.

II. Rolling over for a seller in a losing position

When you're an options seller facing a losing situation, like if you sold a call option expecting Tesla's stock price to drop before their earnings report but it goes up instead, you risk having the option exercised against you.

If you still think the price will fall soon, you can consider using a rolling strategy to help limit your loss.

You can also do a combination of rolling up and out or rolling down and out.

This involves closing your current options position and opening a new one with a new strike and expiration date that’s further out in time.

Rolling up for a call option seller in loss:

Close the current position:

Buy back the call option you sold to stop further losses, for that specific contract.

Open a new position:

Sell another call option, but choose a higher strike price than the first one.

Rolling up and out for a call option seller in loss:

Close the current position:

Just like before, buy back the call option to cap losses, for that specific contract.

Open a new position:

Sell a new call option, but this time pick both a higher strike price and a later expiration date.

Keep in mind, rolling options doesn’t ensure a profit or guarantee against a loss.

You may also end up compounding your losses. By rolling out, the duration is extended, which can also increase risks as there’s more time for the underlying security’s price to move unfavorably.

By rolling up and out, you're counting on more time and a higher price to increase your chances of the option expiring worthless.

You might get a lower premium for the new option, which can help offset the cost of buying back the losing option.

For call options, a lower strike price often means a pricier premium, and more time until expiration can also make the premium more expensive.

You can choose between these methods based on your investment goals and how you think the stock will perform.

But remember, rolling up and out is only a good move if you believe Tesla’s stock price will actually drop.

If you're facing losses from selling put options due to a falling market, and want to avoid assignment, you may roll down by buying back the options you sold and then selling new puts with lower strike prices.

Keep in mind, rolling a short put to a lower strike price will typically lower the amount of premium received.

III. Rolling over for a buyer in a profitable position

Before $Tesla(TSLA.US)$Tesla's earnings release, suppose you predicted a stock price increase and bought a call option.

Post-release, Tesla's results surpassed expectations, boosting the stock price and the value of your call option.

Now, you're deciding whether to sell for immediate profit or hold for more potential upside.

A rolling strategy can help balance these options.

Rolling up:

Sell your current call option to secure profits.

Reinvest the proceeds by buying to open a call option with a higher strike price.

Rolling up and out:

Still sell the existing call option for profit.

Use the proceeds to buy a new call option with both a higher strike price and a later expiration date.

Rolling up lets you capture profits while maintaining a position in the market for further potential gains, all with a lower reinvestment cost.

Even if the new option ends up worthless, you've likely pocketed some profit.

Rolling out extends the time frame, giving the stock more room to possibly grow and potentially increasing your gains.

It also reduces the risks associated with the option's time decay and near-expiration volatility.

But remember, longer-dated options tend to cost more, which might eat into your earned profits.

And just as you'd roll up with call options, you could roll down if you're holding profitable put options and looking to extend your gains.

IV. Risks

Rolling over should align with your investment goals and market outlook. Don't roll over without thorough analysis.

It's a technique seasoned traders often use. If you're new to options, evaluate your position carefully first.

Consider the costs of rolling over, such as commissions for two transactions (closing one position and opening another).

Rolling options doesn’t ensure a profit or guarantee against a loss. You may also end up compounding your losses.

By rolling out, the duration is extended, which can also increase risks as there’s more time for the underlying security’s price to move unfavorably.

With the Options Rollover feature now live on moomoo, you have even more flexibility and control over your options trading strategies.

If you're looking to adjust your exposure in contrast to changing market conditions, consider checking out the Options Rollover feature.

✔️ Easily roll options with just one click

✔️ Have the ability to better manage certain risks when options trading

Please note that moomoo Options Rollover features are not available for Option Level I and II clients.

Clients with Option Level III can roll up and down, but cannot roll forward or backward.

Clients at Option Level IV have access to all rolling functions. The option level can be viewed by referring to the path shown in the following image.

Options trading and level are subject to eligibility requirements.