[Music]
what's going on everybody Chris here
from Project option comm I hope
everyone's having a great day and in
today's video we're going to talk about
strangle adjustments so in particular
the short strangle position that
consists of selling a call option and
selling a put option and in this video
we're going to talk about how you can
potentially adjust that position by
rolling up the short put option now
before we get into the specifics let's
briefly cover what rolling means and
options trading now sometimes you'll
need to make an adjustment to one of
your option positions as the stock price
changes in this example we're going to
talk about short strangle positions now
in options trading rolling is the
process of closing one of your existing
options and opening another option at a
different strike price or in a different
expiration cycle now when you roll to a
different strike price that's called
rolling up or rolling down and when you
roll to a different expiration cycle
that is referred to as rolling out so
rolling out in time in today's video
we're going to focus on rolling up a
short put option which consists of
closing your current short put option by
purchasing it back and then selling
another put option at a higher strike
price now when you do that in one
transaction it's called rolling up now
let's go ahead and visualize when you
might want to roll up your short put
option when you're selling strangles now
in this visual example we're looking at
hypothetical stock price changes in
relation to your short call options
strike price in your short put option
strike price now at the beginning of the
period we can see that the stock price
is pretty much in between the short call
in short put option but then it starts
to rise towards that short call option
now what happens when the stock price
rises towards your short call option now
as the stock price increases towards
your short call strike the delta of your
position becomes more negative which
means you'll start to lose money if the
stock price continues to increase
now when you initially sell a strangle
or an iron Condor typically your
position Delta will start around
zero which means you don't really have
any sensitivity to changes in the stock
price but as the stock price starts to
trend in one direction your position
will actually become directional which
since you're trading a market neutral
position is not what you actually want
now while your position is becoming more
bearish because your position Delta is
getting more negative the short put
price and Delta are approaching zero
which no longer helps you so when you're
short a strangle if the stock price
increases you're going to lose a little
bit of money on your short call option
but you're going to make some money on
your short put option and the two should
offset however as your short put option
becomes further and further out of the
money as the stock price increases that
put options value is going to fall to
zero which means any further stock price
increases aren't really going to
generate profits on that put option
because it's already worthless now if
you can't get anymore profits out of
that short put option that means the
losses on your short call option as the
stock price increases are not going to
be offset now what can you do to help
the situation now one adjustment you can
make to a short strangle position after
the stock price has increased towards
your short call is to roll up the short
put option that you currently have so
since you're currently short that put
option you can roll it up to a higher
strike price by purchasing that put
option back and then selling another put
option at a higher strike price at this
point you might be wondering what does
rolling up the short put option
accomplish
by closing a short put option at a lower
strike price and selling a new put
option at a higher strike price you
accomplish the following things
the first accomplishment is that you
collect more option premium since the
new put you sell is more expensive than
the put you just bought back
that's because put options at higher
strike prices are more expensive than
put options at lower strike prices so
when you sell that higher strike put and
purchase back that lower strike put you
collect a credit now when you collect a
higher premium on your overall position
that means you have more overall profit
potential if the stock price remains in
between your short strikes additionally
since the upper breakeven price of a
short strangle is the short calls strike
price plus the net premium received you
also extend that breakeven point on the
upside which means if the stock
continues to rise you'll actually have a
higher breakeven point which gives you
more room on the upside for the stock to
appreciate the second thing you
accomplished when you roll up the short
put option in a short strangle is that
your positions Delta becomes more
neutral and that means you will lose
less money from continued stock price
increases let's go through a couple
examples so that you can fully
understand what each of these points
actually mean let's consider a trader
who is currently short the 220 put
option but decides to roll up the 220
put to the 235 put now as we can see in
this particular example the 220 put that
this trader is currently short is only
trading for 31 cents which is getting
pretty cheap and is not really going to
benefit them if the stock price
continues to increase so what this
trader can do is they can roll up that
220 put to the 235-foot and they will
collect a premium since the new put that
they're selling is trading for a dollar
and 60 cents but the put that they
bought back which is their initial 220
put is trading for 31 cents now by
purchasing back that 220 put for 31
cents and selling the 235 put for a
dollar and 60 cents we collect a dollar
and 29 cents of premium for that roll
now that means that a dollar in
nine cents of extra premium we just
collected will extend our upper
break-even price on the short strangle
position by a dollar and twenty nine
cents and that also means that our
maximum profit potential increases by a
hundred and twenty nine dollars / short
strangle now what happens to the delta
of our strangle position when we make
this roll now let's say at the time of
the roll the short strangle position
Delta is negative 44 and that means
we're expected to lose $44 for each $1
increase in the stock price
so of course initially we wanted our
position Delta to be around zero because
since we're selling a strangle and we
have a market neutral assumption we
don't want our PL to be sensitive to
changes in the stock price however as
the stock price increases that becomes
more negative because the short call
Delta starts to get closer to negative
one and that short put Delta gets closer
to zero now here's how the position
Delta would change after rolling up the
put from the to 20 strike to the to 35
strike now since our old foot at the to
20 strike has a delta of negative 6 a $1
increase in that share price is going to
lead to a 6 cent decrease in the options
price now since we're short the to 20
foot a 6 cent decrease would yield 6
dollars in profits and that's where the
position Delta of positive 6 comes from
now that 235-foot that we're rolling to
has a delta of negative 30 which means
if the stock price increases by one
dollar that foot is expected to lose 30
cents in value now if we're short a put
option that loses 30 cents that's going
to yield 30 dollars in profits for us
which explains the position Delta of
positive 30 for the 235-foot now that
means the overall change in our position
Delta is plus 24 now that means our new
short strangles position Delta goes to
negative 20 so before we made the role
the position Delta was negative 44 which
means if the stock price increases by
one dollar we're expected to lose $44
now after we rolled the two
when you put up to the 235-foot our new
short strangle position Delta is now
negative 20 which means if the stock
price increases by $1
we're only expected to lose $20 as
opposed to $44 so by rolling up that
short put option to a higher strike
price we neutralize our short strangles
position Delta now in this particular
example we did not completely eliminate
their directional risk but we did cut it
in half now that we've discussed how you
can adjust a short strangle after the
stock price increases substantially we
need to talk about the downsides of
rolling up that short put now while
rolling up a short put increases your
premium received and neutralizes your
position Delta there are some downsides
now the first downside is that you
decrease the probability of making money
on the trade because your put strike
price is now closer to the stock price
so since you roll up that short put to a
strike price that is closer to your
short call strike price you have a
narrower range of profitability however
you do extend the breakeven on the
upside because you collect more premium
the second downside is that your
position Delta gets neutralized which
means a reversal and the stock price
will yield less profits than if you
didn't roll at all
so in the previous example the position
Delta before rolling up the short foot
was negative 44 so that means if the
stock price actually fell by $1 we were
expected to make $44 however after we
rolled up the short put and our position
Delta adjusted to negative 20 if the
stock price fell by $1 we would only be
expected to profit by $20 and lastly
there is a possibility that the stock
price reverses completely in which case
your position Delta will start to grow
positive which means you start to lose
money as the stock price continues to
decrease
alright well that wraps up the short
strangle adjustment of rolling up the
short put option but let's quickly run
through some concept checks to recap
what you've learned in this video first
of all when selling strangles if the
share price appreciates towards your
short call you can adjust the position
by rolling up the short put option by
rolling up the old put to a higher
strike price you increase your premium
collected which extends your breakeven
on the upside and that gives you more
room for the stock price to increase and
you also neutralize your position Delta
which means if the stock price continues
to increase
you'll lose less money than if you had
not rolled up the short put now the
downside of rolling up the short put is
that you decrease the probability of
making money since you have a tighter
range of profitability and you'll make
less money or potentially lose money
from reversals in the stock price so
always keep in mind that when you make
an adjustment to a trade there is always
a trade-off thank you so much for
watching this video everybody I hope you
enjoyed it if you did please do us a
favor by liking the video down below
subscribe to our youtube channel so that
you can continue learning with us and
also feel free to watch some more videos
by clicking on that video on the right
hand side
[Music]