Options offer great position management and risk control potential when using these to trade the marketplace directionally. It goes beyond the basic fact that a long position inside a call or put option comes with an absolute maximum risk equivalent to the cost of the option (plus commissions, of course). That, on its own, is a very beneficial thing. What this short article examines, however, are a few handy little things one can do while holding an option position to increase the return while keeping the risk well limited.
Roll Up/Down
Most traders understand the concept of a trailing stop wherein one moves their protective exit as the market goes in support of the trade. This is often used to lock in profits. The same thing can be accomplished when you are trading options rather than the underlying. This is done by rolling one's position up or down strike prices according to whether or not the trade is a long using calls or short using put options.
Here's a recent instance.
A long position in Seagate Technology (STX) was initiated when the stock was trading at around 21.50 making use of the March 22.50 call options. These were bought for $0.80. The marketplace rallied over the next few weeks, eventually moving up above $24. At that time, a roll-up was executed by selling the March 22.50 calls at $2.60 and buying the March 25 calls at $1.40. This action served two purposes. The very first is that it took $1.20 off of the table, reducing the portfolio exposure and freeing up cash to be used somewhere else. Additionally, it locked in a profit of $0.40 ($2.60 sales price minus the $0.80 cost for the 22.50 calls minus the $1.40 purchase price for the new 25 calls). In the process, it had no influence on the remainder of the upside potential for the trade. The 2 strikes would probably profit approximately the same through the further appreciation within the valuation of STX shares.
In the event the portfolio exposure was looked at as acceptable at $2.60, an alternate course of action would be to sell the March 22.50 calls rather than take any money out, but instead roll it all on the March 25 calls. For instance, if the position was 10 options, selling the 22.50s would net $2600. That cash may have been employed to purchase 18 of the 25 calls ($2600/$140 = 18.57). By doing this, one actually boosts the upside potential for the trade substantially. After all, the full position is at risk, meaning you could theoretically lose the full $2600 invested, that is much more than could have been lost when the trade was initially initiated.
Roll Forward
Among the problems with options will be the limited time-span they give you for controlling trades. If one is an intermediate to longer-term trader, this is an important hurdle. However, in a manner just like the roll up/down, if you wishes to extend the holding time of a position it is now possible by rolling forward the expiration month.
Carrying on with when using the STX example, we're able to take a look at rolling forward. That would be accomplished by going from the March contract to June one. There is the rub, though. As a result of the longer time to expiration, the June contract is priced significantly higher. That is why a roll forward is normally best accomplished by using a roll up/down.
Consider the earlier roll-up in STX from the 22.50 call to the 25 call. As we were still with the former, and needed to both roll forward and up, we're able to jump into the June 25 call. The current price on the 22.50 option is $4.10. With the June 25 at $3.60, we can easily complete both the roll up and roll forward and take $0.50 off the table. That isn't quite as much as we accomplished while using the roll up, however it does extend the time we could hold the position by 3 months. Whether that's really worth trade-off depends on the expected holding period for the trade.
The rolling of strike prices and expiration is a thing simply achieved. The financial transaction charges for options trades have fallen down considerably for the individual trader recently. That opens up a great number of opportunities for taking part in the market directionally and managing positions effectively.
Options can be quite satisfying to traders who learn what they actually do.For anyone who would like to start option trading. Click the link below and have help from an expert. Binary Options Trading Signals Live!
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Thank you for reading my blog.
Dennis Sampson
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