I Will Never Roll A Losing Trade For A Debit

I will never roll a losing trade for a debit.

Not when it feels right, not when the roll looks cheap, and not when I am convinced the position comes back. I roll for even money or for a credit, and I would sooner take the loss than pay to extend one.

I have watched traders do the opposite for years. It is the fastest way I know to turn a manageable loss into an unmanageable one.

Let me show you the whole thing on a real position.

The trade

I sold a $10 wide spread in the SPX for about $2.55.

It went against me. On the last day of its life it was trading at $7.20 with the market sitting right on my strike, and it needed an 18 point sell-off to come back to me.

Fully in the money with hours to go, which is the kind of position that makes people do something expensive.

The roll math

So I looked at rolling it out, and this is where the rule does its work.

Same strikes one week forward was a mild debit. That is a no. Push it another week and it was still a debit, which is also a no.

The only way to roll that trade for a credit was to shift the strikes down. And once you do that, the market either has to sell off or you are rolling into an inevitable loss with extra steps in front of it.

So the honest options were two. Take the loss, or work an order and see if the market gives you a credit.

What I did with it

I put a roll out there for a 45 cent credit and let it sit.

A small pullback fills that order automatically, and I get rolled out two weeks with premium collected. If the market never backs off, nothing happens and asking cost me nothing.

One thing about the SPX more than any other product. If you want something, you damn well better put your trade out there, because otherwise you are never going to fill.

Then I pulled the order, because I wanted to see whether we sold off before committing. Sitting on my hands was a real choice and I am telling you I made it, not that it was the right one.

Why I was in it to begin with

I sold that spread just outside two standard deviations, and I did the math before I entered. The weekly expected move was 111 points, which put the first deviation at 7,600 and the second around 7,711.

I sold right on the cusp of the second one knowing I could get run over, and I have been run over plenty of times before.

If I am going to do something stupid, I am going to do it knowing exactly what I am doing. A calculated risk and a mistake look identical on a screen, and most traders never bother to tell themselves which one they just took.

Two and a half standard deviation moves are rare. When one shows up, the rule is what keeps a bad week from becoming a bad month.

To your success,
Don Kaufman

P.S. Here's the thing about rolling for a debit:

It feels like you're "saving" the trade.

But all you're really doing is paying cash to give yourself another chance to be wrong.

Before you roll anything — or enter any trade — run the 60-Second Pre-Trade Checklist.

It's the five checks that stop you from turning a manageable loss into the kind you don't come back from.

Normally $29.97. Free today.

⇒ Get the checklist before your next trade