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Short Strangle Adjustments: Rolling the Calls

Short strangle chart
Short strangle chart

Sometimes, you’ll need to make an adjustment to your option positions when the stock price moves against you.

In this post, we’re going to discuss the short strangle adjustment strategy of “rolling down” the short call options.

What is “Rolling an Option?”

Rolling an option is the process of closing an existing option and opening a new option at a different strike price or in a different expiration cycle.

Today, we’ll focus on “rolling down” the short call option in a short strangle position, which refers to buying back your current call option and “rolling it down” by selling a new call at a lower strike price.

When Do You Roll Down the Call?

Let’s talk about when a trader would most likely roll down the short call.

Consider the following visual:


Short Strangle Adjustments: Rolling Down the Short Calls

When the stock price falls quickly and approaches the short put’s strike price, the trade becomes directionally bullish. Why? Since short strangles have negative gamma, the position’s delta grows positive as the stock price trends towards the short put.

The result?

The trader starts to lose more and more money as the stock price continues to fall.

One potential short strangle adjustment a trader can make in this scenario is to roll down the short call options:


Short Strangle Adjustments: Rolling Down the Short Calls

To roll down the short call option, a trader simply has to buy back their current short call option and sell a new call option at a lower strike price (in the same expiration cycle).

What Does Rolling Down the Calls Accomplish?

By rolling down the short call option in a short strangle position, a trader accomplishes two things:

1. Collect more option premium since the new call you sell is more expensive than the call you buy back.

2. Your position’s delta becomes more neutral, which means you’ll lose less money if the stock price continues to decrease.

Let’s cover each of these points in more depth.

#1: Collect More Option Premium

Consider a trader who is short the 250 call in their short strangle position but rolls down to the 240 call:

Since the trader buys back the 250 call for $0.11 and sells the 240 call for $2.50, they collect more option premium from the roll.

Premium Collected:

$2.50 Collected – $0.11 Paid Out = +$2.39

In dollar terms, the additional $2.39 in premium means the maximum profit on the trade increases by $239 per short strangle, and the lower breakeven point is also pushed $2.39 lower.

As a result, the stock price can fall even further than it could before and the trade can still be profitable.

#2: Neutralize Your Position Delta

By rolling down the call option, the position also becomes more neutral.

Let’s say that at the time of the roll, the short strangle’s position delta is +45 (the trader is expected to lose $45 from a $1 decrease in the stock price, and make $45 from a $1 increase in the stock price).

Here’s how the position delta would change after the rolling adjustment from the previous example:

Old Call Position Delta: -5 (+0.05 Call Delta x $100 Option Multiplier x -1 Contract)

New Call Position Delta: -47 (+0.47 Call Delta x $100 Option Multiplier x -1 Contract)

Change in Position Delta: -42

New Short Strangle Position Delta: +45 – 42 = +3

After rolling down the short call, the position delta becomes more neutral.

With a new position delta of +3, the trader is only expected to lose $3 if the stock price decreases by $1, as opposed to a $45 loss before the roll.

Of course, this also means the trader is only expected to gain $3 from a $1 increase in the share price, as opposed to a $45 gain before the short strangle adjustment.

With that said, it’s clear that there are some downsides to rolling down the short call.

What’s the Risk of Rolling Down the Short Calls?

While rolling down the short call increases the option premium received (higher maximum profit potential) and neutralizes your position delta, there are some downsides:

1. You decrease the range of maximum profitability, as your new call’s strike price is much closer to the short put’s strike price (and the maximum profit zone for a short strangle is the area in-between the short call and short put strike prices).

2. The position delta gets neutralized, which means a subsequent increase in the stock price results in less profits than if the rolling adjustment wasn’t made. Additionally, the position delta will start to grow negative if the stock price continues to increase after rolling down the short call (resulting in losses if the stock keeps rising).

As with any trade adjustment, there are benefits and downsides. However, if you’re looking for a short strangle adjustment to help reduce the directional risk after a decrease in the stock price, then rolling down the short call is one option available to you.

Concept Checks

➥When selling strangles, if the share price falls towards your short put, you can adjust the position by “rolling down” the short call (buy back the old short call, sell a new call at a lower strike price).

➥By rolling down the short call, you increase the amount of option premium collected and neutralize your position delta (resulting in a lower breakeven point on the downside and less notable losses if the stock price continues to fall).

➥The downside of rolling is that you decrease the range of maximum profitability since your new call strike is closer to the short put’s strike price. Additionally, you’ll make less money (or potentially lose money) from reversals in the stock price after rolling.

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