Our trading would be much simpler if a trade never went against us. Of course that never happens so we need to be prepared to act when we do face a problem. Sometimes the best response is to simply exit the trade. More frequently there is an opportunity to roll the trade either by strike or Duration. Doing so increases our Probability of Profit (POP). When and how we should roll for strike or duration?
A graphic of a short 1 Standard Deviation Strangle, also known as a Dynamic Strangle (16 Delta Put and Call) at trade entry, was displayed. The graphic showed that the Strangle had an initial POP of 68% (100% minus the put leg ITM and the call leg ITM = 68%). The put is further out-of-the-money than the call due to Volatility Skew. Another graphic showed such a trade gone wrong. What was initially a trade with a 68% POP is now a position with a POP of well under 50%. We need to do something.
Rolling the untested strike or rolling the entire position, if possible, can be a preferred choice. The trade was initially Delta Neutral. Since one side has been tested the trade is very directional (this was demonstrated in a graphic) and the tested side which initially had a Delta of 16 now has a Delta of 50. By rolling the untested side closer to the tested side we decrease our directional exposure while collecting additional credit. Should the time remaining be small we can roll out in time. By adding duration we can collect an additional credit and give time for the trade to work.
For more on Rolling Strangles see:
Options Jive from January 11th, 2016: "Rolling Strangles - When, Where, How"
Market Measures from January 12th, 2016: "Probability of Touch After Rolling Strangles"
Market Measures from February 18th, 2016: “Rolling Strangles”
Watch this segment of Options Jive with Tom Sosnoff and Tony Battista for the valuable takeaways and to learn how and when to act on a losing trade to hopefully turn it into a winner.
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