Volatility is the price of admission to the stock market.
If you have sold puts earlier on stocks that you wish to own and prices have come down significantly, you could lower your purchase price & bring in more cash flow by rolling out and/or rolling down.
Rolling Out
Rolling out is buying back your put and paying for the premium by selling another put that expires further down the road.
For example, you sold SE put option with a strike of $240 on 1 Mar 2021 for $10.40 expiring on 5 Mar 2021, effectively bringing your purchase price of SE down to $229.60 per share if exercised.
Last night, SE share price fell to $240 within the first hour.
If you believe that prices will stay depressed, you can consider rolling out.
By buying back your $240 put expiring on 5 Mar 2021 for $3 (i.e. close the position) and paying for the premium by selling a put option with a strike of $240 expiring on 12 Mar 2021 for $10.30.
This will net you $7.30 in inflow. Further bringing down your effective purchase price of SE to $222.30 if exercised!
Rolling Down
SE ended the day at $229.68. This presents even more opportunities for us to use options creatively.
Rolling down is buying back your put, and paying for it by selling another put option with a lower strike price.
Rolling down is usually used in conjunction with rolling out.
Simply put, you buy back your put option sold earlier (i.e. close your position), and pay for it by selling another put option with a longer expiration and a lower strike price.
Applying the similar example above, copied below for easy reading:
For example, you sold SE put option with a strike of $240 on 1 Mar 2021 for $10.40 expiring on 5 Mar 2021, effectively bringing your purchase price of SE down to $229.60 per share if exercised.
When the share price of SE has fallen to $229.68, you could buy back your put option for $13.26.
You could pay for this put option by selling 19 Mar 2021 put option with a strike of $230 for $13.90.
This will bring in a net inflow of $11 ($10.40 - $13.26 + $13.90).
With the new strike price at $230, your effective purchase price for SE would be $219!
Thanks for this article, i always hear about these two terms but never really understand them. I finally do now.