Keep the Premium Flowing: How to Use Rollovers in Option Trading

A rollover combines two steps into one. Rolling means you close an existing option and open a new one with a different strike price and/or expiration date. You can roll positions to a later date or to different strike prices.

When should you consider a rollover?

Approaching Expiration: If the option you sold is about to expire but you still see potential in the trade, you can roll it over to a later date to keep the position open.

Avoid Assignment: If the option you sold is in-the-money and you don’t want to be assigned (i.e., you don’t want to buy or sell the underlying stock), rolling to a later date or a different strike price can help you avoid this.

Manage Losses: If the trade isn’t going your way, rolling over can give the position more time to turn profitable. But make sure to evaluate if it’s worth it or if it’s better to close the trade and cut your losses.

Before Dividend Dates: If you sold a call option and the stock is about to pay a dividend, there’s a higher risk of early assignment, especially if it’s in-the-money. Rolling over before the ex-dividend date can help you avoid this risk.

Change in Market Outlook: If your view on the stock or the market changes, you might want to adjust your position by rolling over to a different strike price or expiration date.

Lock in Profits: If the option you sold has dropped in value and you’ve made a profit, you can buy it back and sell another option with a later expiration to keep earning premium.

These are general guidelines. Every trade is unique. Also consider transaction costs, tax implications, and your own risk tolerance. Have a rollover plan in place before you trade.