When selling options to grow a portfolio you rely on banking that weekly/monthly premium. However, there will be times when the option you sold becomes ITM. What does the option seller do? Ah...yes, roll the option for a credit! Having sold options for 3 years now, I made many mistakes rolling options from choosing the wrong strike and expiration. I truly believe that rolling options is a true skill and more important to understand than your initial strike price section. To test my skill - I placed an ITM put on Coinbase (on purpose) and documented my rolling journey of managing the position and exiting for a profit. I chose Coinbase as it's a volatile stock. The documented playlist is here - https://www.youtube.com/playlist?list=PLjkJhj4gfHjQYnOXCNMi7fdtKdPEAt444 I hope it adds value, ask any questions!
I find rolling it forward is like adding to losing positions. If it became ITM by this expiration, how do you know it won't ITM by next expiration? If it does, you will be making losses again. What's the point? Unless you really see a high probability of the market reversing by the next expiration, I don't see any merit in rolling imo.
From academic papers I have looked at, selling premium seems like an inferior strategy. I've seen long term backtests on it and it always seems to blow up at some point. I guess it's just my preference, but I feel like making directional bets and being long volatility is 'real' trading.
The number one skill in selling options is risk management - full stop. You have the most assymetrical return profile in the markets and getting blown up is a real possibility. As for rolling ITM options, I would defer to Paul Tudor Jones who deftly stated "only losers average losers".
I will take the other side of this, just to see. SPY has a strong support at 360 and I went long 100 shares. I know there is a strong chance of a counter trend and eventually, it will rally to 370 or 380. So, I buy 900 shares at 350 and suddenly, my cost basis is only 351. What’s wrong with this approach?
"What’s wrong with this approach?" Your forecast is correct and it trades up to your goal and the puts go off worthless and you earn the premium, but underperform and miss the move you accurately forecast.
Yes, but I am also avoiding the whipsaws. I am just selling the chance of catching a 20 point move for 2 dollar premium.
Here is the golden rule.If you wouldnt put on a position to open,why on earth would you roll to avoid taking a loss.Is the roll the optimal use of capital?? Almost never...Its flat out dumb.. As for Tudor,when I traded derivatives at an IB,my salesman,quants and I would meet with him and pitch him all sorts of crazy derivative structures... During one of the meetings,he shut us down and said if it doesn't increase his directional exposure via Delta/Gamma ,he had zero interest. If I remember correctly knockouts was his option play..
You asked right? When you sell an option you are effectively selling volatility. What will kill you is realized volatility that exceeds the implied level you sold. Just avoid those events and you're fine. When you figure out how to do it - don't share it because it's a billion-dollar idea. The SPY forecast was your own.
I know for traders, this doesn’t make any sense but for investor/trader kind, this can be a good way to accumulate Index funds like SPY and reduce the cost basis. I have graduated from “selling puts for income” level 2 years ago. Just taking the other side to see if something new comes up.