Roll down is a technical analysis term used to describe the action of rolling a call or put option forward in time to a later expiration date while simultaneously increasing the strike price by an equal amount. This is done to take advantage of the decrease in time value that occurs as expiration approaches.
What are the 4 types of options? There are four types of options: calls, puts, covered calls, and naked puts.
Calls give the buyer the right to buy the underlying asset at the strike price, while puts give the buyer the right to sell the underlying asset at the strike price. Covered calls are calls that are combined with an equivalent amount of the underlying asset, while naked puts are puts that are not combined with the underlying asset.
How do you roll down a put option?
If you are the holder of a put option, you may choose to roll the option down in order to keep the position open and extend the life of the option. To do this, you would sell the put option you currently hold and then purchase a new put option with a lower strike price and a later expiration date.
For example, let's say you hold a put option with a strike price of $50 and an expiration date of June. The current price of the underlying asset is $48. If you wanted to roll the option down, you would sell the put option you currently hold and purchase a new put option with a strike price of $45 and an expiration date of July.
How do you roll a long call option?
A long call option gives the holder the right, but not the obligation, to buy the underlying asset at the strike price on or before the expiration date.
To roll a long call option, the holder would close out their current position by selling their call option, and then open a new position by buying a call option with a different strike price and/or expiration date.
The holder may choose to roll their position for a number of reasons, such as to take profits, adjust their position to account for changes in the underlying asset price, or to avoid or minimize losses.
When rolling a long call option, the holder must be aware of the potential for losses, as they are still obligated to purchase the underlying asset at the strike price if the option expires in-the-money.
What are the terms used in options trading?
There are four key terms used in options trading that you need to be aware of:
1. Options Contract - this is the document that outlines the terms and conditions of the options trade. It will specify the type of option, the expiration date, the strike price, and the premium.
2. Strike Price - this is the price at which the option contract can be exercised. For instance, if you have a call option with a strike price of $50, you can buy the underlying asset (e.g. shares of stock) for $50 anytime before the expiration date.
3. Expiration Date - this is the date on which the option contract expires and can no longer be exercised.
4. Premium - this is the price you pay for the option contract. The premium is paid up front when you enter into the contract and is non-refundable. When should I exit option trading? The answer to this question depends on a number of factors, including your investment objectives, your risk tolerance, and your investment horizon.
If you are an experienced options trader and are comfortable with the risks associated with options trading, then you may exit option trading when it no longer meets your investment objectives or when you no longer feel comfortable with the risks.
If you are a less experienced options trader, or if you have a shorter investment horizon, you may want to exit option trading when the risks no longer seem acceptable to you.