Rolling Up

Hi Mark,

You have previously written articles on roll downs/roll outs/partial exits as adjustments. Could you talk about a roll up as an adjustment.

For example I setup an IC initially to be almost delta neutral; the index moves in a certain direction for a while and I am no longer delta neutral. Let’s say the index moves down. At this point my short put is NOT in trouble and I have no urgency to modify the put spread that is losing money. However I wish to be cut my deltas (say by 1/2 or 2/3 or something), but I don’t want to trade any etfs for my index. Is it viable to roll up the calls a bit for this purpose? Maybe some of the spreads if not all? Or close some and roll up the others to keep gamma the same?

I am looking for some mechanical way of doing this wherein once my net delta per spread reaches a number I can start a (almost) mathematically determined roll up of the “safe” side with the knowledge that a continuing move will eventually make me modify the short spread itself with roll downs.

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By my definition, ‘roll-down’ means that we roll to farther OTM strikes.

Thus the ‘roll-up’ refers to a situation in which we cover a short position and sell another. This time the new spread is closer to the money. The purpose of this trade is TWOFOLD: to reduce delta exposure and bring in more cash.

Yes, this is viable – even when risk does not require that action be taken. By far the most important consideration is to be certain that we cover the old spread before selling the same quantity (or FEWER) new spreads. As I say, it is viable, but personally I do not like to do this (more on that below).

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Be very careful about making this mechanical. There is more to risk management than just keeping delta in line.

1. There is NOTHING wrong with this approach. It is good to keep delta at a reasonable level.

2. However, are you sure that you want to adjust the position before it reaches your ‘adjustment point’? If the answer is yes, this means that when you selected your original adjustment point, you did not make a choice that truly suits your needs. So let’s agree that when delta reaches a point where you want to reduce delta exposure – that is the true adjustment point for you.

I note that the original trade is NOT in trouble, and the question becomes: do you want to disturb your original position? Apparently the answer is ‘yes.’ Not evey trader will want to do that. However, it is viable.

3. I suggest selling fewer spreads than you were previously short. I suggest being careful to get enough cash credit for this trade to make risk acceptable. If you do not collect enough, then if the market continues in the same direction, this trade will not have been of much help. Deltas are meaningful, but if you gain 25 delta and only $40, that $40 is not going to play any role in reducing losses.

Repeating: deltas don’t mean much if there is no cash. In other words, if you cover a 5-delta option and sell a 15-delta option, collecting $0.10 when dealing with 10-point spreads, you may be more delta neutral, but you are selling delta for no cash – and that is not a good idea. So be careful. You need both: Delta plus cash.

4. If the market reverses direction, you are not going to be happy with that roll up. To reduce that unhappiness (and risk), I suggest selling fewer spreads when rolling up. This is an appeasement to the risk gods.

5. When you roll up for any reasonable cash credit, the position will no longer be anything resembling ‘safe.’ It fact, it may resemble an original trade that was a CTM iron condor (but the credit collected will be less).

6. Now to the question as why I do not like to do this. It is personal and please do not allow this answer to influence you. It is purely psychological. No one likes to lose money, but we know it is part of the trading game. If I lose money because the market moved against me, I accept that. Readily.

However, if I closed a cheap spread and then roll-up to get more cash, I am HURT when that trade loses. In other words, money is money, but when I lose it via that route, it is much more painful than when I lose it other ways. Thus, I avoid that psychologically painful situation and I roll up – only occasionally. I prefer not to do it.

So if you recognize that making the best trade that you can make under any given set of circumstances is really the best you can do – that is healthy. You win some and you lose some. And it matters not how you win or lose – as long as you make sound decisions. With that said, I endorse your method. But please be very careful about taking this to extremes. Do not roll a 10-point spread to collect 30 cents. Be certain that the reward of rolling-up is worth the risk. Markets do reverse.

Excellent question.

Addendum: Tuesday, April 10 7:40 AM

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