Rolling options either higher or lower is something I discuss quite frequently in MTM’s Group Coaching class. The reason is many option traders are too quick to roll, in my opinion. Knowing support and resistance have a better chance to hold than break should give the option trader an edge if the short strike is based on levels of support or resistance. Selling premium has so many different risks and nuances that it can drive an option trader crazy. Let me explain in a little more detail and tell you about an example I just talked to a one-on-one coaching student about for several weeks.

Short Options

Selling a call option against a stock position is commonly done by investors (covered call). The call option’s strike is generally sold where the investor thinks the stock will be at the short call’s expiration. The call option expires worthless and maximum is earned for the stock position without being called away (assigned). When a time spread is bought (calendar or diagonal), the maximum profit is earned if the stock closes right at the short strike at the short expiration (just like a covered call) for either a call or put. Choosing which strike to sell is sometimes a challenge, but potential support and resistance can help.

Support and Resistance

Selling the short option close to a support or resistance area makes sense. The reason is that support and resistance have a better chance to hold than be broken. But using a covered call as an example, when the stock price moves through a resistance area and is trading above the short call’s strike, the first thing many option traders want to do is buy back the short option and roll to a higher strike. This works when the stock does indeed continue to move higher. But knowing support and resistance have a better chance to hold, it may make sense to show a little patience.

Johnson & Johnson Example

An option trader who I was working with had several hundred shares of Johnson & Johnson (JNJ). It was early September 2020, and the stock had potential resistance around the $150 level as seen below on this hourly chart. Every time that area was tested, he wanted to buy back his covered call at the 150 strike and roll higher. I told him to be patient and let the stock prove first that it wanted to break the $150 resistance area. Of course, looking below and at the time of this writing, the stock never did. If he would have rolled several times, his positive theta position would have decreased because the strike would have been further out-of-the-money (OTM). OTM options have smaller thetas than at-the-money (ATM) options.

Final Thoughts

Clearly, there are times when it makes sense to close out the short position and sell another strike higher or lower depending on the expected move. But it also makes sense to be patient and let the stock prove to you that it wants to break the support or resistance level. Closing above it or below it just once does not mean it is going to break that level. Be patient and let the stock prove to you what it wants to do. As always with option trading, patience is so important and should always be considered instead of rushing into sometimes regrettable decisions.

John Kmiecik, Market Taker Mentoring