There are many situations where option rollouts may be used. For purposes of this article, being limited in scope, I will just touch on two of the more practical uses of the rollout process. The first is the benefits it gives the covered call player. The second is the remarkable ability of the rollout feature to offer protection against the potential for loss that faces the naked option writer.

How does a roll out benefit the covered call player? Consider this scenario: you own 500 shares in a company which you originally bought some time back at a price of $50. Assuming the market has recently gone on an uptrend and your stock has now appreciated to $60. You are tempted to sell and take in profits from your investment. At the same time you don’t want to miss out on any further upward movement the stock may take in the face of what appears to be a strengthening market. Yet you are also afraid that the market might reverse direction and you could then lose some of the profits you’ve already achieved. Selling call options against your stock enables you to participate in any future appreciation of your stock, and the profits generated from the option sale provides some protection if the market should change direction forcing you to exit your position. If the stock continues rising and hits the strike price at which you sold the calls, you are faced with two nice choices. Let the option holder call the option (exercise his right to buy the stock at the strike price you sold it for) or, roll out the options to a farther expiration and strike price once again allowing you to participate in further gains if the stock continues its upward trend. If you let your options be called you have gained not only the money from the option sale but also from the appreciation price of the stock at the time the option is called. But if you roll out the calls you could continue to stay in the game for a further appreciation in the value of your stocks. Of course there is always the potential of a market reversal and losing the potential for further appreciation. Even so you still have gained the premium money you obtained in the sale of the calls. If the market continues uptrending you can ride the appreciation wave by rolling out your positions several times up to and until you run out of future strike prices. By this time you would have gained substantial profits.

Now let’s see how the roll out benefits the naked option writer. When you sell a naked option, be it call or put, you theoretically face the risk of unlimited losses in your position due to the fact that if the underlying security moves against you the potential for loss is unlimited. The term “theoretical risk” is used here because this risk has been blown out of proportion and grossly exaggerated. While the potential risk of loss does exist it’s a negligible one if you employ appropriate strategies to defeat it. Please see another article on this subject entitled “Risk of ‘Unlimited Loses’ In Naked Option Selling Is A Myth” where it talks about this theoretical risk being totally controllable using proper defensive strategies. One of the defensive strategies mentioned in that article is the use of roll outs.

Here’s a scenario that may face an option writer. Let us suppose you sold naked puts several strikes out-of-the-money with expiration forty to sixty days away. Some time during its life the market turns against you and begins to drop down to the price level of the strike you sold. Many option traders would just close out the position buying back the puts at a higher price and taking a loss. You being the smart trader would roll out your puts by buying them back at the now higher price and at the same time sell new puts farther out in time and several strikes out-of-the-money at a higher price than you bought back your puts. You’ve just converted your original 40 or 60 day puts into longer expiration puts thereby avoiding taking a loss at this point in time. The process of closing and opening positions can be done as a spread trade and in this way you are paying reduced brokers commissions. If the market continues its downward trend you can also keep rolling out your positions repeatedly till you reach a point where there are no more available future options to roll out to. At this point your puts may be so far out in the future that even if it goes deep in the money chances of it being exercised are slim. There is an e-book written on this subject titled “Stock Options: The Greatest Wealth Building Tool Ever Invented” where the roll out process is described in much detail together with other protective strategies for naked option traders. The e-book contains numerous actual trading illustrations of the use of the roll out process. See this article’s author profile for more information.

If you are going to be an option trader or already are one, rolling out is a must strategy in many of your option trades. You will find the strategy highly rewarding and in many cases offers a wide variety of choices to your trading styles. Not only does it enable you to increase your trading profitability but more importantly it affords you the ability to protect your trade positions against certain adverse conditions. As this article is written today, we are in the midst of a financial crises as never seen in a long time. The stock market has now depreciated to panic lows with investors seeing the value of their investments evaporate into thin air. Yet for many option traders extensively using the roll out process they will weather the storm much better than others and they will certainly recover much faster when economic conditions turn for the better.

Hear how the best trading opportunities literally scream from newspaper headlines and corporate announcements. Mergers, acquisitions, spin-offs, liquidations, and other corporate “events” do more to teach us of true value than all of the research and modeling combined. This presentation asks the viewers to consider themselves from the humble positions of “OPMI’s”… Outside, Passive, Minority, Investors, who should resist the temptation to actively impose their (probably false) sense of patterns, and instead search for safer and more predictable annual returns from more viable information.

Dan Ferris has spent over 10 years studying the commodities markets, making countless correct predictions about the price moves of electricity, oil,natural gas and coal in the process. An expert in the field of distributed power generation, Dan serves as a member of Pirateinvestors.com’s key research team. In his monthly advisory service, Extreme Value, Dan seeks out promising compa (more…)

An introduction to trading stock options. Learn more about trading stock options, what are options, what can you do with them. Why do you trade options and how can you lock in profits, insure your gains, and make money in the investing world.

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The butterfly option involves an opening position wherein options (Calls and Puts) are bought or sold at three different strike prices. This option is has both limited losses and limited profits. There are two basic types of butterfly option. One is the long butterfly that can be created by either employing call options or all put options. Because of put-call parity, the long butterfly that is generated from call options will behave like a long butterfly that is created using put options. In short, it doesn’t really matter whether you employ calls or puts to build the long butterfly option.

The long butterfly option can also be generated by buying an in-the-memory (ITM) call option or selling two at-the-memory (ATM) call options and or buying another out-of-the-money (OTM) call option. This is actually a combination of two opposing vertical spread options thus the name butterfly spread. Combining the profit profiles from the butterfly option, the stock prices will fall which in turn can cause limited losses. Also, if the stock prices jumps too high, limited losses can also be faced. However, in case the stock prices stay intact at the ATM option strike price, a limited profit will suffice in the butterfly option.

With that being said, the butterfly option is a good option strategy for low volatility. This is for the fact that betting on stock price that is not moving much so as to collect maximum profits. This butterfly option is also a low risk strategy because losses are limited when the stock crashes or creeps unexpectedly. The bad thing about this is that this can yield limited profits. In the long butterfly option, the trader can also use all put options rather than all call options.

Short butterfly option on the other hand is the exact opposite of the long butterfly. In this option, if the stock price falls, the trader receives maximum limited profits. Also, when the stock price is high, the trader receives limited profit. But here, the stock price doesn’t change much so the trader is faced with a loss, though this loss is limited as well. Short butterfly option is basically a strategy that is high in volatility but neutral in direction. A warning in both short and long butterfly option is that, they involve buying and selling options at three strike prices. This means that the investor needs to pay three commissions to open the position and another three commissions to close it. These extra commissions need to be considered when determining whether the butterfly will be profitable for any circumstance.