But what does it exactly mean?
And why do you want to roll in the first place?
And more importantly, how and when exactly should you roll your Short Put?
If you’ve ever asked these questions, then not to worry!
By the end of this post you’re going to learn everything you need to know about rolling Short Puts so that you can start rolling them like a pro!
What Exactly Does Rolling An Option Mean?
First of all, we want to know exactly what does “rolling” mean and why do you even want to roll in the first place.
So rolling basically just means to close out your current option position, and then simultaneously open another option position in one order ticket.
In our case, because we have a Short Put, to close it we have to buy it back.
So we buy back our current Short Put and then we sell another Put option all in one order ticket.
In the example above, you can see that we bought back the Put option on 12th August, and then we sold another Put option two weeks out on 26th August while keeping the same strike.
And as you can see, we received a credit of $0.82 for rolling the Short Put.
So why do we want to roll our Short Put?
5 Reasons To Roll Short Puts
There are 5 reasons for doing so.
Reason #1: To Improve Your Probability of Profit
When you roll your Short Put, you are actually increasing your chances of making a profit.
So for example, if you had a Short Put at $100 and chose not to roll it, then the stock would need to be above $100 at expiration for you to make the full profit on the premium.
But if you chose to roll it out and down to $95, the stock now only has to be above $95 at expiration to make the full profit on the premium.
Reason #2: Give More Time For The Trade To Work Out
When you roll your Short Put, you are also extending the life of your trade.
And by extending the life of your trade, you give more time for your trade to work out in your favor.
You see, the reason you entered the Short Put in the first place is because you think that the stock is going up.
But many times you could be right in the direction, but you didn’t have enough time for the trade to play out.
By rolling out in time, you give that time needed for your trade to work out.
And if you chose a fundamentally good stock, you could keep rolling until the trade turns out a winner.
Reason #3: Reduce The Chances Of Getting Assigned
What not many people realize is that the chances of an In-The-Money (ITM) option getting assigned is very rare if there’s still lots of time left to expiration.
So for example if you have a Short Put at $100 and the stock is currently trading at $90, it’s rare to get assigned if you still have at least 21 Days-to-Expiration (DTE).
The danger of assignment comes only when there’s less than 21 DTE.
So by rolling out in time when your Short Put is less than 21 DTE, you are significantly reducing your chances of getting assigned.
Reason #4: Get A Better Assignment Price
Now, if you trade long enough, there will be times where you can get assigned.
Getting assigned is part and parcel of trading Options.
The good news is that if you do get assigned, you would be assigned at a lower price than your initial strike price before rolling.
So for example, let’s say you started off with a Short Put at $100.
Then as the stock price drops, you keep rolling your Short Put out and down over time to $90.
And let’s say at this point you do get assigned.
At least you would get a better assignment price than if you didn’t roll.
And if you have the cash to hold the position, this will allow you to hold the stock at a better price until it comes back up.
Reason #5: Cost-Basis Reduction
The beauty about rolling is that you can keep getting more premium as you roll.
And all these premium helps in reducing your cost-basis of the trade.
So if you started off with $1.00 and premium and kept rolling over time until you collected $5.00 in premium…
This would be $5.00 off the price of your stock if you get assigned.
So if you started off with a Short Put at $100 and you kept rolling out and down until you finally get assigned at the strike price of $90…
The effective cost of your stock would only be $85 because you also collected $5.00 in premium to offset the cost of your stock.
And since each Option contract controls 100 shares, you’d effectively only be paying $8,500 to hold $9,000 worth of stock.
Types Of Short Put Rolls
So when it comes to rolling Short Puts, there are a few different types of rolls that you can do.
And it’s important for you to know each of them so you’d be able to use them as the situation calls for each.
In total, there are only 3 types of rolls you can do for Short Puts:
1) Roll OUT – This means to roll to a further expiration cycle while keeping the same strike price.
- For example, you might roll from the AUG expiration cycle to the SEP expiration cycle.
2) Roll OUT & DOWN – This means to roll to a further expiration cycle and to a lower strike price.
- For example, you might roll from the AUG expiration cycle to the SEP expiration cycle, and also roll the strike down from $100 to $95.
3) Roll UP – This means to roll to a higher strike price.
- For example, you might roll from the $100 strike price to the $105 strike price.
When To Roll Short Puts?
Now that you know the three different types of rolls, how do you know exactly when to roll your Short Put?
Scenario 1: When Your Short Put Is ITM
The first scenario where you would want to consider rolling is when your Short Put is ITM.
In the chart above, the Short Put is at the strike of $109 but the stock has already gone down to $101.18.
So this is where you want to roll to avoid the possibility of getting assigned.
There are two types of roll to consider doing here:
- Rolling OUT to a further expiration cycle and getting a premium for doing so. You extend the duration of the trade to give more time for your original strike to work out.
- Rolling OUT & DOWN to a further expiration cycle and a lower strike price, but a lower premium than just rolling OUT. You extend the duration and also lower the strike price to increase your probability of profit.
Scenario 2: When Your Short Put is At-The-Money (ATM)
The second scenario where you would consider rolling your Short Put is when it’s ATM.
That means the moment when the stock price reaches your Short Put strike price, you roll.
This is the most defensive roll because by rolling once your strike gets breached, you eliminate all possibilities of getting assigned.
So for this, you’d have to roll OUT & DOWN each time your strike gets breached.
The downside to this approach is that if the stock keeps going down, you may end up with a Short Put with an expiration date that’s many months away.
That means it would take a long time before you’d be able to realize the profit on the premiums you’ve collected.
Scenario 3: When Your Short Put is Out-of-The-Money (OTM) And The Market Is Going Up.
The last scenario where you would consider rolling your Short Put is when the stock has not reached your Short Put and is starting to move up.
This is where your Short Put is OTM.
Now, at this point, you can simply either take profit on your Short Put, or let it expire worthless and collect the full premium.
There’s no real need to roll since your Short Put has not been breached.
But if you’re aggressive and think the stock will continue higher, you can choose to do an aggressive roll by rolling UP.
By rolling UP, you’d be able to collect more premium.
And if the stock continues to go higher, you’d be able to quickly make more profits on the new roll.
But this is only recommended if you have a very strong view that the stock is going up.
Otherwise, it would just be better to take profits or let the Short Put expire worthless.
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