Options Education: Rolling
The market has traded in an extremely tight range for the past three months, so many long call and put positions will be sitting at a loss at October Expiration. Stocks are just not moving, which is killer for owners of options. (This lack of market movement is why I have limited our call/put buying in the last two weeks)
If they still believe in their trade thesis, traders will sell their losing October positions this week, and roll into new call positions to give their trades more time to work.
Here are some examples from today and previous days:
Example 1: Buyer of 10,000 Alibaba (BABA) November 115 Calls for $1.60 – Stock at 105 (rolled from November 120 Calls)
This trader originally bought 10,000 November 120 Calls for $1.90. A week later, as the stock fell from 108 to 105, he sold the calls for a loss at $0.88. However, he bought November 115 Calls to give himself a better opportunity for his position to finish in the money.
Example 2: Buyer of 34,000 Wells Fargo (WFC) June 40 Puts for $1.48 – Stock at 45.30 (rolled from November 40 Puts)
This trader originally bought 31,000 November 40 Puts for $0.21 on October 10. Today, he sold those puts for a loss at $0.08. However, he is buying June 40 Puts so as to give himself more time to be right.
What’s different about these big hedge/pension funds and you and I, is that these firms have much more capital to trade. They take a loss on their position, and then reload again with even more capital. Personally, if I’m going to be wrong on a trade, I’ll be wrong once, but not throw more money at a trade that isn’t working.
Therefore, if I am rolling a position, I take the capital that I received from selling my calls out, and put the exact same capital in the new call position.