Profit Targets on Rolled Positions

Rolling Positions & Adjusting Profit Targets

Key Concepts:

• Rolling a Position: Adjusting an existing options trade by moving the expiration date and/or strike prices to avoid assignment or manage risk. Typically done for credit.
• Premium Collection: Receiving net credit when initiating or rolling an options trade.
• Defensive vs. Offensive Trading: Defensive strategies prioritize capital preservation, while offensive strategies aim for maximum profit.
• Vertical Spread: An options strategy involving buying and selling options of the same type (calls or puts) with different strike prices but the same expiration date.
• Iron Condor: A neutral options strategy involving the sale of both a call and put spread.
• Short Put: Selling a put option, obligating the seller to buy the underlying asset if the option is exercised.
• Gamma Risk: The rate of change of an option's delta, representing the sensitivity of the option's price to changes in the underlying asset's price.
• Break Even Point: The price of the underlying asset at which the options trade results in neither profit nor loss.

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Understanding the Scenario: Increased Premium After a Roll

The core question addressed is what to do with profit targets after rolling an options position, particularly when the roll results in collecting additional premium (credits). The speaker emphasizes that rolling is typically a defensive maneuver, undertaken when a trade isn’t progressing as planned. This new premium provides more flexibility, but also necessitates a re-evaluation of profit targets. The assumption throughout the discussion is that the roll was executed to collect a credit, not to pay a debit.

Three Options for Adjusting Profit Targets

The speaker outlines three distinct approaches to adjusting profit targets after a roll, ranking them from most aggressive to most conservative:

1. Target 50% of Total Credits Collected: This involves aiming for a profit equal to half of all credits received – including those from the initial trade entry and subsequent rolls. This is described as the most “offensive” tactic, akin to “going for it” and is considered the least favored approach by the speaker. It’s deemed less suitable for a defensive situation like a roll.

2. Target 50% Over the Original Credit: This approach maintains the original profit target (50% of the initial credit) and utilizes the additional premium collected from the roll to improve break-even points and buffer against adverse price movements. This is a hybrid strategy, balancing offensive and defensive elements. The speaker finds this more palatable than the first option, but still cautions against excessive aggression.

3. Ratchet Down to Scratch (or a Small Loss/Win): This is the speaker’s preferred method. It involves significantly reducing the profit target to around break-even, or accepting a small profit or loss. This is considered the most defensive and most common approach, particularly appropriate when a roll is undertaken to mitigate risk.

The Rationale Behind a Defensive Approach

The speaker strongly advocates for a defensive approach to profit targets after a roll, arguing that rolling itself is inherently a defensive action. As he states, “Remember, when we roll a position, that is a defensive maneuver. Like, nobody’s rolling a position and they’re happy about that roll.” He explains that attempting to aggressively profit after a roll creates a mismatch between the defensive nature of the roll and the offensive nature of the profit target.

He uses the analogy of “plugging leaks” and “remedying the ailment” of the position, emphasizing that the goal is to stabilize the trade, not to maximize profit. He acknowledges that a hybrid approach might be suitable in less dire situations (e.g., rolling at 21 days to go to reduce gamma risk), but stresses that a scratch or small loss target is most appropriate when the roll is a response to a losing trade.

Real-World Considerations & Examples

While no specific trade examples are provided, the discussion references common options strategies like vertical spreads, iron condors, and short puts. The speaker alludes to past experiences with challenging trades ("doozies I've had in the last 8 to 12 months") to underscore the importance of a conservative approach when rolling. He also mentions reducing gamma risk and extending duration as potential reasons for rolling, but emphasizes that these are typically done to improve the overall risk profile of the trade, not to aggressively pursue profit.

The Importance of Judgment and Experience

The speaker concludes by emphasizing the need for individual judgment and experience when determining the appropriate profit target after a roll. While recommending a scratch or small loss target as a general guideline, he acknowledges that the specific circumstances of each trade should be considered. He encourages traders to assess the situation and determine whether a small win is still achievable or if accepting a minimal loss is the most prudent course of action.

Synthesis & Key Takeaways

The central takeaway is that rolling an options position is primarily a defensive maneuver. Therefore, adjusting profit targets after a roll should reflect this defensive intent. While there are multiple options, the speaker strongly recommends ratcheting down profit targets to around break-even or accepting a small loss, as this aligns with the goal of stabilizing the trade and minimizing risk. Aggressively pursuing profit after a roll is considered a mismatch in strategy and is generally discouraged. Ultimately, the best approach depends on the specific trade and the trader’s experience and judgment.