August expiration roll-out

So if you've been keeping up with my portfolio you'll know that I came into August expiration week with four option spreads in the money (ITM). You see I'm trying out this new approach in which I roll-out (simultaneously close out the losing the spread while opening a new longer dated option spread) positions that land ITM. The key to making this work is for the credit you receive on the new spread to offset the loss on the recently closed ITM spread. Basically you're putting off the loss by extending the trade. This literally buys you some time for the trade to work out in your favor.

Seems great right?!

Well here's what I learned about that last week. Most of the time when you roll these positions out you DRASTICALLY reduce your overall credit and at the same time DRAMATICALLY increase your downside risk. Let me show you.

Lets start with AFL... I was originally in an August 62.50/60 put spread with a $510 on 10 contracts. Friday AFL was trading right around $60, so this play was a goner! Here's the deal, I was facing about an $1800 loss on this play. So I needed a new spread that would AT LEAST bring in that amount in credit. Even in that case though I would only break even. That right there was eye-opening. I mean I would have tied up $2500 bucks for 5 months just to break even??  

First I looked to roll it down to a 60/57.50 put spread. I checked November and even January. There was no way those plays would bring in the $1800 credit I needed. I moved up to the 62.50/60 spreads. Those were a bit better, but I was still coming up short about $200. There was NO WAY I was going to roll my strikes higher, the only way to get more credit would be to play more contracts. So instead of 10 like I always do, I played 15. This combination worked. Let me give you the specifics.

I closed my original AFL spread for an $1,860 debit. Then at the same time, on the same order, I opened a November 62.50/60 put spread collecting a $2,295 credit. I'm left with a $435 CREDIT! Good news, right?! I avoided the loss and kept the majority of my $510 credit.

Technically, yes. But lets drill down on this play and talk about the downsides. First off, I wasn't able to lower my strikes AT ALL. Second, my downside exposure went WAY up! On the original play my max loss was $1,970, now it's $3,315. This means if I'm not right come November - I'm gonna get HURT! Lastly I lost some of my original credit. I went from $510 to $435.

So in short, when you roll out you lessen your credit and increase your risk exposure. Here's a few more examples. I won't go into as much detail with each play as I did with AFL, but you'll see the pattern of lesser credits and increased risk.

My TWTR play is a prime example... I rolled my August 47/46 put spread into a September 47/46. I went from a $440 credit to a $30 credit, and a $560 max loss to a $970 max loss.

Next up is my KO spread. I rolled an August 42/41 put spread into a November 41/39 spread. As you can see I opened my spread an additional strike. I also had to play 15 contracts instead of 10. So even though I increased my credit from $270 to $370, my downside risk went WAY up from $730 to $2,630.  

My fourth and final ITM spread was HSY. I was in an August 95/90 put spread, only 1 contract though. When HSY opened above $92 on Friday I simply bought back in my short strike and left it at that. In total I took a $207 loss. You can read more about it here in my 2014 Loss Analysis. 

Well folks there you have it - a full, transparent disclosure of how I slipped through last week. Yes, I avoided some losses and lived to fight another day, but the question is - did I create a bigger mess for myself?

Only time will tell.  

For all you folks out there finding this blog for the time, I'm the Option Rider. I play with a wide open hand, for better or for worse! Please feel free to look through my open positions, my winners, AND my losers. Any advice, thoughts, comments or helpful tips are welcomed at