#112 - Can We Roll Inverted Strangles From One Month To The Next?
Hey everyone, Kirk here again from Option Alpha and welcome back to the daily call. Today, we are going to answer the question – “Can we roll inverted strangles from one month to the next?” The simple answer to this question is – Yes. Of course, you can roll your inverted strangles from one month to the next or one expiration period to the next. The question now is going to become – “Can you roll them for a credit?” Meaning you don't want to pay to roll the position. Here's how I would generally set it up and just walking through how I would think about it as we roll positions. We’ve done this before in the past, so it’s not something that we haven’t done. We’ve done it a bunch of times and it generally works out pretty well when you extend your trade and give yourself more time. Let’s say we have a position. For whatever reason, we got inverted on the position, meaning our calls are below our put strikes. We go inverted. Let’s say we’re inverted by $2, so a very small inversion. Sometimes we can get inverted by more than that, but let’s say we go inverted by $2. Our short puts are say 102, our short calls are at say 100 just to make the math and the thought process easy. If that happens, then the minimum value of that inverted spread would be $2. At expiration, remember that inverted strangles and spreads like that can never trade below the width of the inverted strikes. If we’re $2 inverted, then it’s never going to be worth less than $2. Now at expiration, let’s say that we still want to make back some money on that trade and we think for some reason that the stock may stay in that range or may stay very tight in that range, whatever the case is. And so, we want to roll that position to the next month. Now, the key is going to be – Can we roll that position to the next month for a net credit? That means that we’re going to have to buy it back for something more than $2 right now just to close the front month contracts and we're going to want to resell the next month contracts for something more than we paid to close the front month if that makes sense. We’re going to close the front month contracts, we know we’re going to pay more than $2, we want to pay as close to $2 as possible, but we know we’re going to pay more than that unless we hold it right up until expiration and then we want to sell the back month options for more. In most cases, you can do this. Now, I’m not saying all cases, obviously. You got to check the pricing and make sure you can do it. But in most cases, you actually can roll these inverted strangles from one month to the next for additional credits. Now, why would we want to do this? Well, if you go back to some of the other podcast that we’ve done, especially even Facebook Lives and on our weekly podcast, we did a huge show, I think Show 111 or 112, somewhere in there on which is actually kind of ironic because I think this is the daily call, is 112 today. But somewhere around there too on the weekly show, we did a huge talk about going inverted and pricing, etcetera. When you go inverted, it doesn’t mean that you’re guaranteeing a loss. Most people think that. But in this case with the example that we have today, if we go inverted by $2, we might have still collected a net credit of $3. Even though we’re inverted by $2 and we have to pay $2 regardless, our net credit is still $1. Well, if we can roll for a credit of say another $1 to the next contract month, then we’ve taken in a total credit now after rolls of $4 and now, we've actually increased the amount of money that we could potentially make and widened our breakeven points, gave ourselves more time, whatever the case is for the next month. This idea of just continuing to collect credits is really, really important when you’re managing positions and considering to roll them from one month to the next, especially with inverted strangles, inverted straddles, iron butterflies, etcetera because we want to increase our overall credit which helps pad or widen our breakeven points for the next month. If you can’t roll for a credit, it's not worth doing. I’ve said this a number of times. It is not worth paying to roll to the next month. It’s just worth it to close the position, start over fresh. Chalk it up, scratch it up as a loss and move onto the next position. Reset the probabilities and try to do it again. Don’t quit. Just try to do it again. Reset the trade. Hopefully that helps out. Again, if you have any questions on rolling positions, let us know. Shoot us an email, send us a tweet, post it on Facebook, however you want to get in touch with us, obviously, let us know. We’ll make sure we get your questions answered. As always, hopefully you guys enjoy these. Until next time, happy trading!
