Mastering the Art of Rolling Credit Spreads

10% Credit Spreads
3 min readNov 10, 2023

--

Today, I want to delve into a powerful strategy that can transform the way you approach credit spreads. It’s called “rolling,” and it’s the secret sauce to turning losing trades into winning ones.

In this article, I’m excited to share how I use the rolling technique to recoup losses or minimize them to almost zero. With this method, you can trade credit spreads with confidence. Even if your trades go south, you have a strategy to bounce back.

The Basics of Rolling Credit Spreads

Before we dive into the intricacies of rolling credit spreads, let’s establish a solid understanding of what it entails. Credit spreads, such as put credit spreads, are options strategies that profit from stable or rising asset prices. However, just like any trading, there’s always a risk of the market moving against your position.

When you roll a credit spread, it means you’re not giving up when a trade is going south. Instead, you’re extending your strategy’s lifespan to potentially recoup losses. This technique can be a game-changer for traders who are tired of letting losing trades completely erode their capital.

A Real Example Of Rolling Credit Spreads

Now, let’s explore how rolling works with a visual example. Imagine you’re trading a put credit spread, where you profit as long as the stock stays above a specific price level. We enter the trade at a profit of $25, and our stop-loss level is set at $50.

Here’s where the magic of rolling comes in. If the stock’s price drops below our stop-loss level, instead of accepting the full $25 loss, we initiate a roll. A roll involves opening a new trade with a lower strike price, typically about 1% lower, but on the same expiration date. The probability of success with the new trade is around 88%.

Now, you have two scenarios:

  1. Winning the Second Trade: Let’s say you win the second trade. In this case, you gain $15. However, since you lost $25 in the first trade, your net profit is now -$10.
  2. Losing the Second Trade: In the event that the stock’s price breaches the new trade’s stop-loss level as well, you incur another loss of $35. When you add this to your initial loss of $25, your total loss becomes -$60.

Now, you might wonder if it’s worth it to roll trades. The beauty of rolling is that it reduces the size of your losses. Without rolling, you’d have a $25 loss, but with rolling, your losses are either -$10 or -$60. This technique helps limit your losses and often allows you to recoup some of them, mitigating the impact on your account.

The Benefits Of Rolling Losers Into Winners

Rolling isn’t just about minimizing losses; it can also contribute to your overall trading success. Here are some key benefits of the rolling strategy:

  • Preservation of Capital: Rolling allows you to protect your trading capital by reducing the size of losses. This can be crucial for maintaining a healthy trading account.
  • Increased Probability of Profit: By giving your trade a second chance, you benefit from an 88% probability of success with the new position. This can help turn losing trades into winners more often.
  • Emotion-Free Trading: Rolling decisions are often based on predefined rules and not influenced by emotions. This discipline is essential for consistent and profitable trading.

The Goal Of Learning How To Roll

In the dynamic world of options trading, knowing how to roll credit spreads is a valuable skill. It provides a safety net for your trades, allowing you to minimize losses and, in many cases, turn losing trades into winners.

By understanding the rolling process, visualizing it with examples, and embracing its benefits, you can enhance your overall trading strategy. Remember, trading isn’t just about making money; it’s also about preserving and growing your capital. With the rolling technique, you’re well-equipped to do just that.

Tried of big losses and not knowing what to do in tricky situations? Grab my FREE OH SH*T ASSISTANT that will show you step by step how to manage any bad situation when trading credit spreads

Thanks for reading 🙂
Austin Bouley

--

--

10% Credit Spreads

I help people who work-full time or have a family make 10% a month using credit spreads! If you don't make money with my alerts and strategies, I refund you :)