Friday Q&A

Friday Q&A Hello Smart Option Sellers! Let's get to the questions! Q: hi lee thanks for the response to two of my inquires i have to query the analysis of the risk of a roll you said there can be a double loss that is true in one respect when the first trade is closed for a loss that is it there is no carry over the trade is close and you are out then to offset the debit you sell another put that premium is money it the bank at this point you have offset the loss on the first trade the premium cant be taken away if it expires there is no loss repeat as necessary A: This question is in response to my analysis in a previous Q&A alert of how we execute a "roll" trade if necessary as a defensive action. In the roll, we would buy back the original put-sell position (possibly for a loss) and re-sell a new put-sell trade on the same stock in a further-dated month using a lower strike price. The sale price of the new put option would be large enough that it could cover the loss taken on the original trade, as long as we could close it out profitably down the road. If the stock ends up moving higher, we would be able to close out the new trade and book an overall profit between both trades. What I mentioned in the last Q&A is that there was a possibility of taking a double loss if the stock continues to move lower. How would that occur? Well, if the stock moved low enough to invoke our stop-loss action (which is if it moved 35% below the strike price), we'd have to close the newer put-sell by buying it back too. This would surely entail a loss on the trade, as well as the loss on the original put-sell trade. That would be a double loss. In theory, you could close out the new trade for a loss and roll again, continuing the position even further into the future. But if the stock keeps falling, this could really make for a bad trade. Probably