Online options trading can be a tricky balance at times. Closing out a trade gaining value is suitable for securing profits, but closing it early could be sacrificing further profit potential. On the other hand, you could always roll a losing trade to an additional expiration date, but you run the risk of it not working out, and you end up taking on bigger losses than if you terminated the trade early. These are just a few examples of what could happen, but it helps to showcase the idea of knowing when to roll a trade to a further expiration date or when it closes it down early, either in the pursuit of profit or to limit your losses.
Key Takeaways From This Guide Upfront
- What rolling and closing mean in options trading
- When to roll a losing trade
- When to close a losing trade
Understanding when to cut your losses vs. holding on could be the difference between salvaging a trade or sinking deeper into losses. Most importantly, options trading is about managing your losing positions effectively to mitigate capital loss over time. Our guide will go into great detail about knowing when to roll or close so you can retain more money over the long term.
What Does it Mean to Roll vs. Close a Trade?
There’s a significant difference between rolling a trade and closing it completely. Learn how each of these processes works and which would work best for the situation at hand. Before choosing one of the following, it’s best to consider your market outlook and a few other factors, like your risk tolerance and the costs or benefits of each option.
Rolling a Trade
“Rolling a trade” refers to adjusting your trade by substituting one option’s position with another without fully closing out your current position. You are technically closing out the original position and opening up a new one, but you’re still dealing with the same underlying asset or stock. However, you’re changing the expiration date (or even the strike prices) to suit your trading goals.
Why Traders Roll
To avoid realizing a loss, adjust the strike price or buy more time for the position to work. Trades can use rolling to lock in profits or sidestep losses when adjusting strikes. They can even extend the duration of the position to give more time to realize gains, which can be done by making small modifications to the strikes.
Closing a Trade
“Closing a trade” refers to terminating an investment or completely exiting a position like a stock or another underlying asset. In the context of options trading, this refers to selling the options contract before expiration to lock in the loss. If you’re dealing with a long position, you can close the trade by selling a stock or security you had previously bought. The other scenario is buying back a short-sold security.
Why Traders Close
Traders or investors typically close traders to capture profits if the market is moving in their favor, or they might do it in a scenario where the market is against them to limit further losses or prevent additional risk. A more neutral reason for closing out a trade would be to free up the margin for new opportunities, the entire idea of opportunity cost.
Factors to Consider Before Making a Decision
Before you commit to closing out your trade or rolling your position, several factors are worth considering, which we’ll address in this section. We alluded to some of these points—some of it depends on the situation at hand, and other parts revolve around what type of trader you are and what you’re hoping to accomplish to meet your trading goals.
Trade Size and Risk Tolerance
Part of choosing the right strategy is knowing what kind of trader you are and how much you’re generally willing to risk on each trade. You will have a different approach if you’re a more conservative trader than you would if you have a more aggressive approach. Let’s look at a few questions traders need to ask about their approach and trading goals before committing to rolling or closing a position outright.
1. How much of your portfolio is tied up in the trade?
If you’re a responsible investor or trader, you’re typically not tying up more than 1-2% of your total capital in any given position. However, some traders are more aggressive than others, willing to stake more capital if the conditions are favorable to realize a significant profit. Sometimes, it might be best to close out the trade to avoid further losses, but sometimes, rolling when the future conditions look good could be the answer to giving your positions more time to work in your favor.
2. Can you afford to take on more risk by rolling?
Rolling positions means the trader incurs additional risks. Paying to extend the trade (rolling at a debit) can increase the risk the trader takes. Plus, there’s the potential for the trader to pay more for the time value of an option if you roll to a later expiration date. Suppose it doesn’t seem like the cost of rolling is worth it based on the profit you’ll make for the trouble. Consider closing the trade to lock in profits, minimize losses, or free up the capital for other purposes.
Time Until Expiration
Another primary consideration is the time left on the options contract until its expiration date. If there’s still some time left, a tanking investment could still have the time needed to turn around, but it’s best to roll in some cases. We’ll address a few of the best questions about the expiration of your contract.
1. How much time is left?
Options contracts might not even need to be rolled out if there’s still time remaining for the trade to work out. This gives you adequate time to close it out early if you’re in a good spot to lock in a profit. If the market conditions are against you and there’s still time remaining, there’s no need to roll immediately. Keep monitoring the position and then roll only if time is running out and you’re likely to incur a loss.
2. Can the market turn around before expiration?
We already mentioned his point in the last question, but it warrants its own section. This is where you have to decide if you’re willing to take a minor loss early on and use the capital elsewhere for other opportunities or if you’re willing to ride out the market and see if the positions can turn around before expiry. This is where a study of market sentiment comes in handy—traders should note upcoming events or signs that the market will turn around to time this move correctly.
Volatility and Market Conditions
It’s also key to think about volatility and the current market conditions. Volatility works in the trader’s favor, where the market moves in their favor when it wasn’t before. It also has the adverse effect of turning around a position that was profitable into a losing investment. Traders must watch volatility to know when it’s best to get out of a position or roll it.
1. Is the market in a high volatility phase?
When market volatility is ticking up, it’s best to be alert and know when to close out a position to maintain profit or minimize potential losses. It’s well-known that volatility increases options prices, so these are prime opportunities to watch your investments grow in value. However, you also have to gauge when those positions might fall back in value after the period of volatility.
2. Will volatility work in your favor or against you?
Although volatility can often be seen as a negative thing, it can play a key role in driving the price of your investments up due to the uncertainty.
Position Status and Distance to Break-Even
Traders should also consider how close the position is to the break-even point of the trade. If the position is too far out, it’s likely not to recover, and traders are best off closing it early. However, the trade might be within striking distance and worth rolling to a further expiration date as long as the market conditions look promising. Let’s review a few of the questions that traders should ask regarding the status of their current position and how far it is from breaking even.
1. How far is the position from your break-even point?
The break-even point for a trade is when the total revenue gained from the position equals the total costs tied up in opening and maintaining the position. It results in neither a profit nor a loss, and this can be an ideal place to end, especially if you’re dealing with a losing trade. Everything should be a wash rather than incur a loss. If your trade is close to the breakeven point, you shouldn’t roll because that would increase your total costs. If you keep things as is, you can incur a minimal loss, or the market could push your investment toward the breakeven point.
2. Will rolling bring the position closer to profitability?
Unless you see a trend in the market where there’s an event after the expiration date of your trade that will bring the stock price of your trade up to or even past the break-even point, you should consider letting your trade run through to its expiration date without rolling. In many cases, rolling causes the trader to incur additional costs, further increasing the profitability gap. Plus, rolling doesn’t guarantee profitability. Market dynamics like volatility or significant events can drive stock prices higher.
When to Roll a Losing Options Trade
Let’s go over the best reasons to roll positions losing value. Specific scenarios warrant this kind of action, but there are some cases where it’s best to close out the position altogether. The points we’ll be covering here are the best reasons for extending the life of your position to give it enough time to become profitable.
- If the underlying asset is still within a reasonable range – The first scenario where you’d want to roll a losing trade is when the stock price is close to your strike price, but you expect volatility to push it back in your favor. Traders can roll the position out further to allow for more time for the markets to experience the volatility needed to make the stock price go over the strike.
- When you believe there’s still time for recovery – If the market has a potential reversal shortly, it could be best for the trader to roll out the position, giving the stock price an adequate amount of time to completely recover. It’s critical to note the importance of patience and time decay in certain positions like credit spreads.
- When you’re adjusting to a favorable risk/reward setup – Changing the strike price or expiration can help traders better align their moves with the current market expectations. Rolling can be a favorable option if you’re interested in making a slight adjustment to achieve a better scenario where the potential reward is more proportional to the risk involved.
When to Close a Losing Options Trade
Although rolling sounds fun and adventurous for traders to turn a losing investment around, it might not always be the best move. Sometimes, it’s best to go the unglamorous route, play it safe, and close out the trade to limit potential losses or lock in profit while it’s there.
- If the position is no longer in line with your analysis – In the event that there’s a significant market shift away from your original plan or strategy, it might be time to close out the position entirely. This could occur if there were a big event that no one anticipated, or it could be something as simple as the trader getting the direction of the market incorrectly, and the desired result no longer being within reach. The key takeaway here is to take no longer viable trades and close them out.
- If the trade has reached your maximum loss threshold – A good way to know if your trade should be closed is if your maximum loss threshold has been reached. In this case, there’s no more wiggle room to take on additional losses. A good reason that traders even set up predefined loss limits in the first place is to protect capital in the long run. This is a decent rule-of-thumb if you’re wondering about closing out the position completely, being the right thing to do.
- If the trade is eating up your margin or has too much risk exposure – Trades should be closed out if your profit margin isn’t worth the effort or if you have too much risk riding on the trade where the potential loss incurred would be worth the potential reward. Closing out an options position early helps traders to avoid liquidity crunches or to prevent margin calls.
- If you need to free up capital for other opportunities – Traders deciding between rolling or closing out their position should think about the potential reward and the idea that the money could be used elsewhere to make money. This can become a strategy in and of itself—you can purposely realize losses early when the trade is unlikely to recover, and you can simply pivot into new, more favorable positions.
Pros and Cons of Rolling vs. Closing
Traders will experience different pros and cons with both rolling and closing positions—it’s good to know these before proceeding with either action as you trade options online. You’ll see many of the highlights of what we’re discussing in this guide below, and it should give you a decent idea of which move would work the best in any given situation.
Pros of Rolling
- More time for the trade to recover
- May reduce the cost basis of the trade (adjusting strikes)
- Potentially lower risk if the market moves favorably
Cons of Rolling
- More risk if the underlying asset continues to move against you
- Additional margin required
- No guarantees of success – rolling only extends risk
Pros of Closing
- Limits the loss and prevents further deterioration
- Frees up capital for new opportunities
Cons of Closing
- Realizing a loss means no chance for recovery
- Could prevent you from benefiting from a market rebound
Common Mistakes Traders Make When Deciding to Roll or Close
Don’t make these mistakes if you want to roll or close out options positions. You often see traders or investors falling into these blunders and getting the timing incorrect on when to roll or close their trades, but you don’t have to be one of those people! Keep reading to learn how you can stay away from these common mistakes.
- Rolling in hope rather than strategy – A big mistake traders make is rolling a position, but not rooting that decision in sound research. You only roll if you’re certain of a market recovery when the market trend is firmly against you. Before rolling your position, ensure a viable path to achieving the turn-around for your investment. Otherwise, you’re only going off of wishful thinking.
- Not considering the total risk and margin – There’s a situation where the trader allocates too much of their investment capital into a single position; that is, they gain overexposure due to excessive rolling with on trade. Traders who roll excessively without a clear strategy can increase their overall risks significantly by increasing the time horizon and being overexposed to market fluctuations. This mistake can occur easily if the trader doesn’t fully consider the total risks and margin involved with the position.
- Failure to set stop-losses or exit plans – Another big mistake is not knowing when to roll or close out a position. This can apply to nearly any trading scenario involving options. If you set up a good exit plan for your trades, you could incur losses that could be avoided if you had just exited the position early. There’s a time and place for taking the smaller loss early and not digging yourself into a deeper hole through rolling.
- Closing too early and missing out on potential recovery – Overreacting to short-term market fluctuations can be another mistake that traders make when they go to close out positions. If they close out those trades too early, they could pass up potential gains or miss out on a recovery opportunity. It’s key for traders or investors to keep a close eye on fluctuations and have the judgment to know which are long-term or short-term. Knowing the difference could mean holding onto your trade for the appropriate time.
Case Study—When to Roll vs. Close in Action
Now that we’ve guided you through all these major concepts about closing out or rolling trades, let’s walk through an example trade scenario that illustrates these concepts in action. Find out when it’s best to close the position or roll it out to a further expiration date or even a spread!
Example #1—Closing the Position
A losing call option on a stock nearing expiration will likely expire as worthless if the stock price of the underlying stays below the strike price. This kind of trade is usually unlikely to be exercised for a profit. A trader might benefit from closing the position entirely to take on a slight loss. They could roll to further expiration or roll the position into a spread to salvage it. Still, there’s no profitability guarantee, and traders risk taking on bigger losses.
Example #2—Rolling to a Spread
This strategy takes on additional risks but can work out for some traders in certain instances. When we refer to rolling the losing call option into a spread, we refer to a bull call spread. The trader would close the original call option and sell another at a higher strike price, creating the spread that comes with limited risk but also limited profit potential. This gives your losing position the chance to be a part of a more profitable trade.
Example #3—Rolling to Further Expiration Date
This last scenario involves the trader researching future market movements. Suppose there is an event beyond the original expiration date that should drive the stock price of the losing call option higher. In that case, it might be a good idea to take on the expense of rolling the trade to a further expiration date to make the trade profitable. It all depends, though—is the cost of moving worth it for the profit you make in the end? Or is it best to close the position and take a small loss, freeing up capital for other ventures?
Final Thoughts—Finding the Right Balance Between Rolling and Closing
Knowing when to roll a position, close it out early for a profit, or limit losses can be a taught call. It’s like poker—know when to hold them and when to fold them. We cannot stress enough the importance of managing losses effectively. A lot of it is tied up in the trader using sound risk management practices and avoiding emotional decisions. Mastering the role or having the judgment to close a position can take time and practice.
Key Takeaways
- Evaluate risk, market trends, and time before deciding
- Set loss limits and follow them
- Don’t rely on hope—base decisions on analysis
- Keep capital and margin management a top priority
Throughout our guide on rolling or closing positions, we’ve clarified that it’s essential to analyze each trade based on market conditions or the time left until the expiration date and to account for your personal trading style. Consider how much you’re willing to take risks to get ahead (risk tolerance).
Our Final Tip: Whether you roll or close, always have a plan to prevent emotional decision-making from dominating your strategy.
