" Rolling " an Options trade ..... " Roll " Out ? " Roll " up/down, Vertical Roll ??

M

md2324

I need some insight and help please, in Understanding which method is Best for me..... Given what I'm looking to Achieve with my Options Trades ( via Staying Long in these Positions ) WITHOUT having to close them out, take the Profits, and then buy back in, to a new trade and Start all over again , Thus giving up the Potential for even Further gains, on my first and initial Options Trade(s ) that I placed

Here's the Premise of the Trade:

I have a Bias from my Analysis that stock XYZ is going to make a HUGE move to the upside
I want to trade Outright Options on this trades ( long Calls )

So what I'm trying to understand and figure out , is if there's a way to stay in my initial trade , and just keep Buying more and more time , WITHOUT having to ever close out my position ?

Theoretically , let's say I want to stay in an options trade for 9 months ( and maybe even for 1 year ) ,
but only wish to buy 3 month out till Expiration Contracts , and then analyze and look to buy another 3 month out , etc. , etc. ,.... so long as the trade continues to look Bullish

What would this Method of Options trading be called, and how would I go about placing and adjusting it ?

I could buy a 1 year out LEAP when I first put on the trade I guess, but the Options on LEAPs ( given so much time to Expiration ) are a bit to Pricey ...... That's why I'm looking at those with 3 - 4 months out till Exp.


QUESTION:
1. Does the Delta for the Options I buy, always need to be around a certain number , for the strategy I'm looking to Employ to work?


On the Movie ( The Big Short )
it shows them Making a Killing in the Options Market ( Prior to them selling short the Housing Market ) , and although they didn't spend much time delving in to what exactly they did via Options trading to make a killing in the markets ......... It seems that they did some sort of " ROLLING " technique ?

Thank you for any and all insight and help ,
I very much appreciate it
 
The idea behind you calling a leap pricy seems dicey .. you have to ask yourself what really makes an option. Cheap or expensive....rolling is typically a way to stay I. Short vol trades...a good recipe for a blow up
 
At expiration,

1. You are only profitable if the final stock price is higher than strike + call premium

2. Assuming that being the case, starting from ITM the % profit goes up, reaches a peak and then goes back down to zero at some higher strike.

3. You should be able to get the probability curve for various strikes to see the probability of stock price reaching that point or touching that point at any time. So, for me the delta depends on my view of the underling movements and my risk appetite (high probability vs low probability play).

As for rolling, if you have not done so I suggest you read Lawrence McMillan's book (or any books on options) on "Options As A Strategic Investment", Chapter 3, Call Buying, he discussed possible follow up actions, and rolling was one of them.

Good luck.
 
By knowing you want to maintain a call position for a year, you can view the rolling as a spread strategy. Roll out is a debit calendar spread. Roll up/down is a bear/bull vertical spread. Rolling both is a diagonal spread. In all cases, the short option is the one you already own and will be the near month for rolling out. Figure out when each spread would be appropriate and you can try to time your rolling when market conditions are right.

You may not make as much as you think if the stock goes up due to rolling costs. The advantage is if you think it will crash and want to stay in the market in case it goes up. You're doing a long stock + long put strategy with less capital.
 
With this strategy you really need to think about time decay. If you think the stock is going to move between now and 1 year, if you keep buying 3 month OTM calls, you potentially lose a lot on paid premiums. Can you handle the calls losing a lot through time decay (theta)?

If you buy OTM calls (or ATM), I would certainly rollover about a month before the options expire... if at that time they are still OTM... before they really lose a lot through theta.

Try to assess where you think the stock will go in your huge move. How much do you want to invest and potentially lose altogether? Don't bet all on the first trade, since you might lose it all... that way you still have enough to bet on the next round....

PS. notice the way I use Bet instead of Trade... I consider this a bit of a roulette trade....
 
When buying the option you are actually placing two bets:

1) The direction of the move
2) When it will move

A near term option suggests you are expecting it to move quickly, whereas a long term option suggests you have no idea when it will move. Therefore there will be a bit of a premium on this.

If you can not determine when it will move, perhaps you should consider the alternative:
Go Long the stock itself.

This way you do not pay a time decay penalty, nor need to roll when there is sudden market volatility (regardless of that effect on the company you wish to invest on).

Alternatively, you could get deep in the money (delta 1) long options. This simply gets you better leverage at a higher cost (but with less loss due to time delay).
 
Some quick thoughts for you,

Here's the Premise of the Trade:

I have a Bias from my Analysis that stock XYZ is going to make a HUGE move to the upside
I want to trade Outright Options on this trades ( long Calls )

So what I'm trying to understand and figure out , is if there's a way to stay in my initial trade , and just keep Buying more and more time , WITHOUT having to ever close out my position ?

Theoretically , let's say I want to stay in an options trade for 1 year ) ,
buy 3 month out till Expiration Contracts
analyze and look to buy another 3 month out ..

What would this Method of Options trading be called, and how would I go about placing and adjusting it ?

Answer: This position is rolled with a calendar option spread to close out existing trade and enter a new long call trade out 3 months.

QUESTION:
1. Does the Delta for the Options I buy, always need to be around a certain number , for the strategy I'm looking to Employ to work?

Answer: The Delta changes not only based on the strike but also as time changes and where the option is relative to the strike. Not relevant in this problem per se..
I would suggest you start with your target price and premium paid vs strike price and work out your expected profit and whether that is acceptable. Then think about paying that premium every 3 months and the impact on the final profit. The most likely conclusion will be to buy the stock and sell a one year straddle and collect all the premium. Your risk will be owning more stock at about half its current value in some cases while you wait for the rally. This means you have to accept the cap on profits equal to the one year straddle premium and strike price. The premium should be significant.

On the Movie ( The Big Short )
it shows them Making a Killing in the Options Market ( Prior to them selling short the Housing Market ) , and although they didn't spend much time delving in to what exactly they did via Options trading to make a killing in the markets ......... It seems that they did some sort of " ROLLING " technique ?

Answer: They bought put options on stocks and call options on CDS of vehicles used to securitize mortgages. These long options have a premium and time decay attached to them.
There is a big cost to keep rolling these options just like Ackman with his long HLF puts. There needs to be a big move down the road at some point to help recover this cost and make a profit. But like in the movie, when you are right, the market makers dont want to make a fair market to you and thus you need a capitulation move where the market makers are also bleeding to exit the trade and retire!
 
Stymie said:
But like in the movie, when you are right, the market makers dont want to make a fair market to you and thus you need a capitulation move where the market makers are also bleeding to exit the trade and retire!
More...

This is no problem in normal listed options. Assuming the move is big enough you can just exercise the calls and sell the obtained stocks.

In the movie they (mainly Burry) couldn't get the fair price, because the derivatives where on specially made assets. They were not normal listed options.... they were more like derived bets for which he was paying premiums. So similar to options, but custom made. And so the banks were marking at the prices more suitable for their own books...
 
JackRab said:
This is no problem in normal listed options. Assuming the move is big enough you can just exercise the calls and sell the obtained stocks.

In the movie they (mainly Burry) couldn't get the fair price, because the derivatives where on specially made assets. They were not normal listed options.... they were more like derived bets for which he was paying premiums. So similar to options, but custom made. And so the banks were marking at the prices more suitable for their own books...
More...
Interesting. I went online and read up on Michael Burry. Very interesting guy. The part I want to share is he said shorting mortgage backed security, the subprime type was so logical. He also said he now focused his time looking for good (big) longs. I supposed 'The Big Longs" just isn't as sexy a title.:D
 
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