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  • Writer's pictureScott Richter

What is “rolling out up” and “rolling out down?”

When a stock is out of the money, there are several different moves that you can make. If you’ve been watching my daily live videos on YouTube or Facebook, you’ve probably heard me talking about “rolling out up” and “rolling out down.” And if you’re one of my Patreon members, then you’ve been getting access to all of my trades in real-time, and you’ve actually seen me rolling out up and rolling out down. But still, it sometimes helps to have absolute clarification on these kinds of things, right? After all, if you’re going to make money in this game, the right terminology is important.

The best way to illustrate these terms is probably by giving examples. Let’s say Apple today was $120 a share, and you had the $115 contracts. And let’s say that, on Monday, when you wrote that trade, Apple was $117, and then you sold the $115 contracts for one dollar, and now Apple has gone up three points, and it’s now $120 a share. Now, your $115 contract that you wrote for a dollar is now 25 cents, and there’s only three or four days left in the expiration week, and now Apple is five dollars away from the strike price.

So, here’s where our terminology comes into play: At this point, you can either let that “roll,” and just wait it out, and you’ll just make that profit that’s left, or, if you think that Apple is going to continue to go up, you can move it up a couple of points, and “roll up.” So again, that $115 put to open is 25 cents, and now you want to go write $118 contracts at 60 cents, so you would pick up 35 cents more. (And if you had 100 contracts, this would make you an additional $3,500, as long as Apple was above $118 on Friday, when the option expires.)

Of course, there’s risk here in rolling up: If Apple comes back down to $116, then the contract that you got for 60 cents would now be two dollars, and you’ll lose some money. So, then what you would have to do is go out to the following week, and then those contracts would now be between two and three dollars, because the longer you go out, the contract is always worth more money. So, in that case, while you may have a short-term loss for the week, you will have the opportunity to recover that loss long-term.

Of course, this strategy doesn’t always work… If Apple has a huge movement, and you don’t have extra capital in your account to roll out, then you would have to sell/liquidate, and that could lead to further loss – so you’ll definitely want to be cautious here.

Another option at the end of the week would be to “roll out down,” instead. In this scenario, you’d write the $116 contracts for two dollars (instead of $118 contracts), so you wouldn’t make any money that week. But this would take two dollars in exposure off the table for the following week, and then, if Apple goes back up above $116, you have nothing to worry about, and it’s time to profit once again – not as much as in the previous scenario, but at least you’re not going to suffer any loss, because you took less risk.

What it all comes down, really, is this tolerance for financial risk. Ultimately, this is the main factor that’s going to influence your decision to either roll out up, roll out down, or make a variety of other decisions with varying degrees of risk. So, assess your risk wisely, and trade accordingly. Good luck, Money Makers!

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