AS YOU KEEP ROLLING THE SHORT OPTION FROM ONE EXPIRATION TO THE NEXT, YOU GENERATE ADDITIONAL CREDITS. THOSE OFFSET THE COST OF BUYING THE STOCK (FOR A COVERED CALL) OR THE LONG OPTION IN THE FURTHER EXPIRATION (FOR A DIAGONAL). HENCE, YOU INCREASE YOUR POTENTIAL FOR PROFIT.
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MMM MMM … ROLLS
“Rolling” is an important concept in trading, particu-
larly when it comes to calendars and diagonals. The
roll is when you buy to close the near-term short
option and sell to open a further-term option at the
same strike price, while leaving the long option alone.
Because the near-term option is cheaper than the fur-
ther-term option, that transaction generates a credit.
The idea is that as you keep rolling the short option
from one expiration to the next, you generate addi-
tional credits whether it’s done in a covered call or a
diagonal. The additional potential credits offset the
cost of buying the stock (for a covered call) or the
long option in the further expiration (for a diago-
nal). Hence, you increase your potential for profit.
The bigger the credits you get for the rolls, the more
you offset the cost of the stock or the debit of the long
option. On the flip side, with smaller credits for the
rolls, you don’t offset the cost as much, and your risk
(amount of potential loss) isn’t reduced as much. A
word of caution: Due in part to the uncertainty of the
total credits you can get from the rolls, an adverse
price move in the stock is still a risk to your positions.
NOW THAT YOU’VE TAKEN THE DIAGONAL PRIMER,
are you convinced that they’re not quite as bad as you
thought? Hopefully so. And if you decide to trade
them, use the free tools on the thinkorswim platform
to analyze the strategy and see where it loses money,
as well as how to enter the diagonal order as a single
The information contained in this article is not intended
to be investment advice and is for educational purposes
only. Multi-legged option strategies such as those discussed in this article will have additional costs due to the
additional strikes traded. Be sure to understand all risks
involved with each strategy, including transaction costs,
before attempting to place any trade. Be aware that
assignment on short option strategies discussed in this
article could lead to unwanted long or short positions on
the underlying security. Clients must consider all relevant risk factors, including their own personal financial
situations, before trading. Options involve risk and are
not suitable for all investors. Supporting documentation
for any claims, comparisons, statistics, or other technical
data will be supplied upon request.