If a stock is now priced $25 and I sold naked put options at StrikeP $22.5, how do I set a GTC combo order in IB such that when the stock drops to $23, an order will automatically cut loss(by buying back) the put options I sold and at the same time sell another amount of lower StrikeP put options at $20? What are the Pros & Cons of this basic "delaying loss, collecting premium" rolling options approach? Is it ok to do this for call options too? i.e selling naked call options and rolling up or out when price moves towards StrikeP?
You are basically doing a spread (buying back a lower-priced option and selling a higher-priced option. I did some "rolling" but I did it manually using either the spreadtrader or basket trader feature. I do not recall if there is a GTC, market-if-touched feature for a "rolling" trade. You can roll with either a covered call or a covered put.
With IB you setup a Combo order to buy one option and sell another. Then you can make it conditional by highlighting the un-transmitted order line and right clicking modify, condition. Then you can specify the condition you desire (either on the underlying or option price). Like everything else rolling options can be a viable if the market moves in the direction you anticipate. Don