The Ultimate Guide to Rolling Credit Spreads (Short Vertical Spreads)

What do you do if you have a Credit Spread that is not working out and is losing money?

One way would be to close it and wait until you have another setup to place another Credit Spread trade.

You don’t have to win every single trade.

If you are disciplined and stick to your trading rules, you can be profitable in the long run.

But if you think the trade will work out in your favor if you give it more time, then the other way would be to roll it.

So how do you roll Credit Spreads?

When is the best time to roll?

And should you even roll in the first place?

This ultimate guide will share with you everything you need to know about rolling Credit Spreads and more.

What Exactly Is Rolling?

Rolling is the simultaneous process of:

• Buying back your existing Credit Spread (usually at a loss).
• Selling a further dated Credit Spread.
• Both are done in a single order for a net credit.

Let’s say, for example, you currently have a 407/412 Bull Put Spread that’s now worth $1.12.

You had initially sold it for $1.00 so it’s now losing $0.12 (which equals to $12).

And let’s say, you’re planning to roll this trade out in time.

To roll it, you would have to close this Bull Put Spread (for a loss).

Then you would open another Bull Put Spread with a longer expiration date and at a credit that is more than what you paid to close the original Bull Put Spread.

And you do this in a single order (this example is using the TD Ameritrade platform):

So in the example above, we bought back our Bull Put Spread for $1.12 and sold a further dated Bull Put Spread for $1.28, which gives us a net credit of $0.16.

It’s important to always roll for a net credit because if you roll for a net debit, you end up adding more risk and reducing the max profit for the trade.

When To Roll A Credit Spread?

Now that we know how to roll a Credit Spread, the question now is when exactly do you roll?

So let’s say, for example, we are bearish on the Index ETF SPY and we sold the 415/420 Bear Call Spread:

At which point do we roll our Bear Call Spread?

First of all, we know that as long as the market is below our Short strike at expiration, we will make the full profit on the trade.

That means, if our Bear Call Spread is not In-the-Money (ITM), then there’s no need to roll.

Secondly, we want to use the 21 DTE (days to expiration) as a marker to decide if we should roll.

Using 21 DTE As Our Marker

Why 21 DTE?

That’s because as the Options get closer to expiration, the extrinsic value will start to get lesser and lesser.

And any Short Option that has very little extrinsic value will be in danger of early assignment.

That means that if our Short Call gets assigned, we will be Short 100 shares of SPY.

And if we don’t have enough capital to fulfill the margin requirements for Shorting 100 shares of SPY, we will get into a margin call.

So as much as possible, we do not want to get assigned.

Hence, we use the 21 DTE as our marker.

As long as there are more than 21 DTE, there’s a very low likelihood of getting an early assignment.

Finally, we want to only roll if we can get an overall net credit.

So the 3 criteria to roll our Bull Put Spread are:

• Less than 21 DTE.
• Short Call is tested.
• Can get a net credit.

If there are more than 21 DTE and our Bear Call Spread is ITM, we don’t do anything.

That’s because there’s still time for our trade to work out and we’re not in danger of getting assigned.

If we roll too early, we may end up with a trade that has too many DTE left, which will take a long time for us to profit from.

If there’s less than 21 DTE and our Bull Put Spread is still Out-of-the-Money (OTM), then we look to roll only once our Short Call is tested.

Otherwise, we do nothing and let the trade work out.

And if the Bull Put Spread is already ITM when it reaches 21 DTE, this is the time we look to roll if we can get a credit.

In the example above, let’s assume there is now 18 DTE and our Bear Call Spread has been breached.

This is where we look to roll.

The first option is to roll out in time while keeping the same strikes.

By rolling the 415/420 Bear Call Spread to the 16 Jun 23 expiration date, we were able to get a net credit of $0.36.

With this credit, we were able to increase our max profit by $36 and reduce our max loss by $36.

So if we had initially sold the Bear Call Spread for $1.50, that would mean our initial max profit was $150 and our max loss was $350.

By rolling for $0.36, the max profit for this trade would now be $186 and the max loss would be $314, making the risk-to-reward ratio better.

So if we are able to roll this trade out each time, then we’d be further increasing the max profit and further reducing the max loss.

The second option is to roll out to the 16 Jun 23 expiration date and to roll up our strikes to 418/423.

For this option, while we were only able to get $0.02 credit, we increased the chances of our Bear Call Spread working out because it’s now OTM.

Whether you choose to go with option one or two comes down to whether you prioritize more profits, or an increased chance for the trade to work out.

Rolling Credit Spreads Doesn’t Always Give A Credit

While rolling Credit Spreads can be a good way of increasing profits and reducing risk, it’s not always that you can roll for a credit.

In the example above, we have a Bull Put Spread on AMZN that has gone ITM.

And if we tried to roll this out to a later expiration date, it would still be a debit.

That’s because of the Long Put.

While rolling the Short Put would give us a credit, rolling the Long Put would be a bigger debit than the credit received.

Hence, the overall roll becomes a net debit.

And we never want to roll when it’s a net debit because it reduces our max profit and increases our max loss.

That’s why when rolling Credit Spreads, there’s only a small window of opportunity to do so.

If you let the Credit Spread get increasingly deeper ITM, then it becomes harder to get a net credit for rolling.

And if you’re in a situation where your Credit Spread is already ITM and there’s less than 21 DTE, and you’re not able to roll for a credit…

Then this is when you might either consider closing the trade for a loss or hold on to the trade hoping it turns around and not get you assigned.

I prefer the earlier approach.