rolling up married put and the "25% rule"

Discussion in 'Options' started by wmtrader, May 31, 2011.

  1. wmtrader

    wmtrader

    I have heard that, when the stock goes up, the time to roll up the married put to the next strike is when it costs around 25% (25% to 30%) of the difference in strike prices to implement the roll up (ie for $1 difference in strikes pay around $0.25 as the difference in sale of existing put and buying higher strike put).

    Can anyone explain the reasons for the "25% rule" as I would have thought that having the additional protection of a higher strike put would be worth anything up to the difference in the strikes (ie up to a $1 for rolling up by $1). Obviously I am missing something, but not sure what.

    I imagine it might be something to do with not limiting delta too much in case the stock keeps going up, but I am not sure.

    Comments would be much appreciated.