Options: Explanation Of Rolling Out A Position

Many traders use the selling of options as an income-generating device. A question that comes up in this connection is when, and whether, to do what is called rolling out your position.

What Is Rolling Out an Option Position?

Selling an option position that has not yet expired in order to buy another option position that has more time to expiration is called rolling out an option position

Ticker board with Roll Over in the middle

Before we go into this further, first let’s back up a step and describe how an income generating option trade works in general.

Trading Options for Income Generation

One way to do this is to look at an asset, such as a stock or exchange-traded fund, that you currently do not own but which you would be willing to buy if you could do so at a good price. You then sell a Put option with Strike price at that desired purchase price. For example, you see that the Gold ETF, called GLD, is selling for $141.00 per share. You notice that it’s been fluctuating between $139 and $145 for quite a while. You decide that you would be willing to buy 100 shares of GLD at the lower end of that range, around $139.00.

To take the next step, you’d need a stock brokerage account set up for options trading, with at least enough cash in it to buy the 100 shares of GLD for $13,900 altogether.

Checking the options listing for GLD, you find that there are Put options that expire in 30 days at the $139.00 strike price. The Bid price of the options is $.82 per share.

You might decide to sell one of the Put options. In your broker’s online trading platform, you would enter an order to sell 1 GLD put expiring in 30 days. Before accepting the order, your broker’s software will check that you do have the funds available to buy the GLD shares if and when that happens. If you do have the cash, the order will be approved. You will have sold the Put. Your account will be credited for $.82 per share, $82.00 altogether (each option involves 100 shares). The $13,900 is not removed from your account, and you do not receive the GLD shares yet. Your account balance is now $13,982, with $13,900 of that reserved for the possible future purchase of the GLD shares.

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