Trading tactic: Rolling to the bottom – v3

  1. Find a stock that moves daily more than 3 option strikes at least 3 times weekly.

  2. Select a direction in which you want to trade. Use 6 months chart. If the stock price is close to upper support level- the direction is bearish, if the price is close to lower support level – the direction is bullish.

  3. Sell an option spread a on the money. Sell it on Friday or Monday with expiration next Friday. The spread is one strike price apart. If you are bullish on the stock, sell a put bull spread. If you are bearish, sell a call bear spread. In both cases one option is above the stock price, the other is below. Aim to sell the spread for more than 50% of the total possible loss. Price of the sold spread is 2% of the available money in the account.

  4. On expiration Friday, 
    a) If the spread is out of the money allow it to expire or buy it back for very low price (about 2% of what was sold for). Go to 1. and reaped.

    b) On expiration Friday,
    If the spread is on the money or in the money, it is a loosing position. 
    Roll it to next week in the following manner:
    – Buy back all spreads from the position. Sell same number of spreads for next week at a price that is no at least 66% of the price used to close the initial spreads. The strike of the new spread should be closer to the stock price if possible. The spread is still one strike wide. 
    – Sell one more spread on the money for the other 33% of the money used to close initial spread. The number of spreads should be less ( about half) than the number of initial spread. 
    The new position should bring the same amount or more than what was used to close the previous week position. All new spreads strikes should be closer to the stock price than the previous week strikes.

  5. A week later go to 4.

This kind of rolling adds only 50% more spreads to the position which allows more rolls before the amount is too big for the account. Once start rolling, do not change direction of the spread until it expires. This means bull spreads keep rolling into bull spreads, bear spreads keep rolling into bear spreads. As exception change direction only something dramatic happens on the market.