One of the most frequent questions I get as an options trader is how to safely roll options that are in the money. In the video below, I share my thoughts on the best guidelines for rolling both puts and calls. I go over all the option positions that are ITM and how I plan to handle them.
When deciding to roll any type of option it is important to revisit if you still want to own the underlying stock or ETF. Reassess if anything has changed with the investment. For ETFs this is limited. However, you might find that a better fund exists for you. So, in this instance it would make sense to close the existing position and open a new one on the new ETF. Now for stocks it becomes a lot more involved.
When it’s time to roll a company reassess all the reasons you choose the company. Has any of the following items changed.
- Has the management changed direction or alluded to future changes. For instance, have they had a change in upper management, announced a dividend cut or made concerning remarks about future performance projections.
- Has the company taken on a lot more debt or missed recent earnings? This might indicate that the company is struggling. Look at YoY earnings to be sure that future projections have not dropped.
- Has the company’s primary product line been impacted by competition. Check news reports and the latest publications to see if a competitor is impacting performance.
Now if nothing has changed and you still want to own the stock at the current strike price then your next consideration is how deep you are in the money (ITM) and how many days until expiration. (DTE) The deeper ITM and the fewer DTEs the higher the risk of early assignment. This is true for both Puts and Calls. However, how you handle them is different so we will discuss each separately. In both sections below I am referring to strategies that relate to selling puts and calls to make short term income. You might buy puts or calls but they are not the main focus.
Rolling Puts
For rolling puts that are ITM you might like the security but since the stock has come down in price you might get the feeling that you no longer want to own it. Remember the points above and that you are now in a good position to own the stock. Some of my biggest misses have been not letting some ITM puts get assigned. I could have owned Apple and Google at great prices, but I got into a rolling frenzy.
Now if this is not the case for you and you want to buy yourself more time than the days to expiration and how deep in the money you are is critical. I reviewed all my early assignments the past two years and almost all of them were more than 10% in the money. This seems simple but since I figured this out it has reduced early assignments. Since implementing the 10% rule I have had a lot of positions move up and out of the money. Now DTE is important but not as much as the 10% rule. Of course, the closer you are to expiration the higher the likelihood that you will be assigned early.
When researching how early assignment works, I did find that the Options Clearing Corporation (OCC) uses both a First in First Out (FIFO) and a random assignment process. Meaning that just the act of rolling can reduce the chances of early assignments. So, your probability of assignment goes up over 10% ITM and a lower DTE. Then once the assignment request goes through it is generated to the OCC and the OCC allocates it out to a different broker based on a combination of FIFO and random assignment.
Rolling Calls
In some ways rolling calls is more important than rolling puts. Since I typically do not want to sell my positions, this is the case for me. The points above concerning rolling puts also apply to rolling calls. Meaning the closer you are to expiration and the deeper you are ITM the higher the likelihood of early assignment. I think calls can be even deeper ITM before being assigned early.
I have had Covered Calls on ED that have been close to 20% ITM and have not been assigned. For ED I have regularly rolled to higher strikes or the same strikes for additional premium. To keep things simple for now I am going to use the 10% rule for both puts and calls. Another important consideration with covered calls is the dividend Ex-Date. Be sure to keep track of it. If your Covered Call position is either ITM or near the money it might be assigned early because the owner of the call wants the dividend. It is good practice to manage your trade a couple of days before the dividend ex-date. This is also true with expiration. Typically, mange your trade at least a couple of days before expiration.
In the video below I go into more detail about rolling and even discuss how you could roll a put to a different stock or ETF. Since you are closing an existing position and opening a new one you do not have to open the new position in the same security. Finally, at the end of the video I go over my existing trades that are in the money.
Now if you have a different way to manage rolling trades, please leave a comment below.
Thanks for joining me on my journey!