Turn Losing Options Trades Into Winners Using This Strategy

Turn Losing Options Trades Into Winners Using This Strategy!

Have you ever been in a losing options trade and thought, "It's over." or, "This will never come back."? I'm sure just about every options trader has been in that scenario at one point or another.

In this post, we will look at a great strategy that you can implement to make some money back or at least mitigate losses. As your positions start to lose value, many traders like to "average down" or "double down," trying to pick up more contracts at a lower price, so it is easier to break even. While that strategy might work sometimes, it's not suitable for the long term. If that trade keeps falling, that loss will be disastrous. This post will show you a great way to increase your profitability on a losing trade that you can deploy immediately. Let's get into it! 

Rolling Over Options: What Is It?

   Rolling over options trades is a pretty simple topic, but a lot of traders over-complicate it. To "roll over" your options trade, all you need to do is:
1. Close your current options position.  
2. Find a further expiration (preferably with the same strike price).  
3. Buy the further expiration.  
It's really that easy! You are just exchanging your current option for an option that has more time left until expiration. By doing this, you exchange your current low-quality option for a higher quality option. The higher quality option allows more time for your trade to work out and makes it easier to profit.  Let's go over an example with Snapchat really fast!

Snapchat Example
Let's say you have the SNAP 54 strike call that expires in a couple of days, and you paid $121 for that call option. Over the course of a couple of days, the option's value decays. The problem is that now your call option is only worth $42. Most traders would look at the $42 and buy even more contracts to "average down," as discussed earlier. Instead of averaging down and digging yourself a deeper hole, you could sell your 54 strike calls that expire in 2 days and buy the 54 strike calls that expire in a couple of weeks. By doing this, you're essentially dumping your options that only have a couple of days to work in your favor and exchanging them for options that have a couple of weeks to work in your favor. The time decay (theta) on the options that have weeks until expiration will be much less significant compared to the options that expire in a couple of days.

Almost always, having more time left until expiration is better, especially if you plan on holding the option for multiple days or weeks. Here is an example with Snapchat's options chain. 

These two options chains (above and below) are for SNAP. You can see the pricing on the 53 strike calls is a lot higher on the November 19th expiration compared to the November 12th expiration. As options get closer to expiration, their pricing goes down due to theta decay. Just because the short-term options are cheaper, it does not mean they are a better investment. The opposite is usually true. The options with more time cost more, but they are usually better investments.

What Is Delta & How Can It Affect My Options

Investopedia says delta is "the ratio that compares the change in the price of an asset, usually marketable securities, to the corresponding change in the price of its derivative. For example, if a stock option has a delta value of 0.65, this means that if the underlying stock increases in price by $1 per share, the option on it will rise by $0.65 per share, all else being equal."  

Options delta values can be complicated, but they are important. Delta represents how much the option will move relative to the stock moving, but it can also gauge probability. The delta value can give you an idea of how likely that option is to expire in the money. Taking the absolute value of the option's delta will give you a rough idea of how likely that option is to expire in the money. If you have a put option with a delta value of -.40, that specific option has about a 40% chance of expiring in the money. If you have a call option with a delta value of .65, that specific option has about a 65% chance of expiring in the money.  
The whole point is to know that if your option's delta value keeps decreasing, you should react somehow. If it falls below 0.20, then you should maybe roll that position. If the delta is 0.20, then that option only has a 20% chance of expiring in the money, so you may as well roll it at that point. You can make multiple strategies, like rolling your options when their probabilities of expiring in the money fall to 5%, 30%, 40%, or a specific threshold you choose.

When to Roll Over Your Positions
Rolling over your options trades can be a smart move to make as expiration approaches. As options get close to expiration, they lose more and more value each day due to theta decay. If you think the stock will rise next week, but the expiration is this Friday, you might need to roll that trade over. You'd do this because the chance of the trade profiting by the expiration date is not in your favor.

 1. Sometimes it might be beneficial to roll a play over ahead of earnings or a major event. These events can bring a lot of volatility into the stock, which can affect its price. The more time you have until expiration, the less these events or moves will affect your option.  
2. If you are losing in a big way and it looks like your stock won't recover by expiration, it would be smart to roll over your trade. That way, you gain the benefit of time and higher quality options.      

2 Big Reasons To Roll Over Your Options Trades  

Rolling your options trades over gives you two significant advantages: more time and higher quality options. When your option has more time, your position will have more opportunities to work out in your favor. More time is almost always better unless you are a day-trader. Higher quality options with longer-term expirations usually have much better "greeks" than shorter ones. This makes it easier for you to profit. You can save a lot of money by rolling your losing options trades. It goes to show that there are strategies out there that can help you even when you're down.