 Hey, hello everybody, this is Lee Lowell from SmartOptionSeller.com Today is Saturday, October 9th, 2021. How's everyone doing today? Welcome to another edition of our Saturday YouTube videos of options education. I would like to give everybody some free options trading information that I've learned over the last 30 years of being in this business so I make these videos usually on a Saturday to try to help you become a smarter and better and profitable options trader So we talk about lots of different subjects here. We talk about strategies, repairs, spreads, all different kinds of options strategies. I get emails all the time. Hey Lee, can you make a video about this? Can you make a video about that? So what I do is I like to take a little time on my Saturday to record another free video for everybody to try to help you. So what are we talking about today? We are talking about defense slash repair, how to roll a put option. As you might know here at the SmartOptionSeller, we are big put option sellers and put option spread sellers. Those are our two bread and butter strategies. Why? Because we like to take more of a neutral to bullish directional type of trades that have a lot of opportunity to win, high probability to win and put selling to me is one of the greatest option trading strategies. So we do a lot of those and we get questions all the time. Specifically recently in the last month or so where the stock market has been selling off and individual stocks are selling off. People want to know how to repair or at least help them with a position, a put sell that they've done. When you sell a put option, obviously it's more of a bullish trade and when stocks go down, it doesn't work out so well for the put option sell. And every once in a while, you may have to invoke a defense strategy or defense mechanism or repair because the position is going against you and there's nothing wrong with that. It happens all the time. Nobody's right all the time. So you'll have to sometimes invoke a repair situation or take a defense strategy when you sell a put option, right? And that's only when the stock is going down and that's what's been happening in the stock market over the last month or so. So I've gotten some questions. People want to know how, what they can do with this put sell that they put on that is now currently under water. You remember, when you sell a put option, you're selling it for one price and if the stock goes down, that put option value goes up. Meaning, if you had to close a trade, you'd have to buy back that put option at a higher price than what you originally sold it for. So that could lock in a loss. Nothing wrong with that happens all the time, you know, especially if we're wrong about our directional assessment on a stock. So instead of, you know, buying the put option back and locking in a losing trade, there's something that you can do to help lengthen out the trade and give yourself more opportunity for that stock to turn around and move higher again. And for that put sell position to become profitable. So what we'll talk about today is how to roll a put sell that you've done. Now put sell is just a option lingo for put sell position, a put option that you've sold. So we call it a put sell. Okay, that's just the lingo that we use. So the the the lesson today is how to repair a put sell or how to roll a put sell. That's one great method that we use. That's the first method that we use when we have to invoke some kind of defense mechanism in our service. So what does it mean to roll a put option? And we're going to go through an example here. So as you know, just going down my list here, this is my cheat sheet. I always put these things out so you can read them and see what we do. Now put sell position, when you sell a put option, it's called a put sell. You're obviously hoping for the stock to go up and if the stock goes down, that put option value goes up in price. So instead of buying it back and locking it a loss, what you can do is roll the trade, roll the put option and give yourself more opportunity to eventually be right in the position. So what does that mean? When you roll a put option, what does it mean? Well you're going to buy back your original position, you're going to buy back the position that you already have on and most likely you're going to buy it back for a loss. But instead of just walking away at that point, what you're going to do is you're going to sell another put option for a further out expiration date at a lower strike price than your original position. So what this ends up doing for you is that, yes, you're taking a loss on that, you're probably taking a loss on that original position depending on the price of the option at that time. You're buying back that original position, but you still believe in the trade. You still think the stock is going to go higher in the long run. So you want to stay in the trade. So you sell another put option on that stock just using a further out expiration date and a lower strike price. And the key here is that you want the price that you have to buy the first put option back to be equal to at least when you sell the new one, you want that sale of the new option to be the same or higher than what it costs you to buy back the original position. So let's just look at my example here and then we'll go into a real position. We'll look at an option chain and we'll see how that looks. But here, let's just say you sold a couple months ago, you sold in October, 2021, $50 put option and whatever the price was. Let's just say you sold it for 50 cents a contract. And now that put option is worth a dollar or a contract. So if you sold it for 50, now you have to buy it back for a dollar. That's going to lock in a 50 cent per contract loss. So right here. So let's just say you sold the 50 put option and now you have to buy it back for a dollar per contract. Now, in order to help offset that 50 cent per contract loss and remain in the trade, what you'll do is now you can sell a December 2021 $40 put option for the same or higher actually in this example for $1.05 per contract. Right. So you have to buy the October one back for a dollar, but you're selling this new December one for $1.05 per contract. You're selling it for five cents more per contract than what it costs you to buy back your original position. And that's a net five cent credit between those two trades. You're buying something back for a dollar, you're selling a new one for $1.05. That's a five cent credit between those two trades. And this is what's called rolling down and out. Let me change this here. I'd like to be proper with my sentences. You rolled down and out. What does that mean? It means you've rolled, you have the 50 put option was your original and you're rolling it down to a 40 strike put option. So you're rolling it down and rolling it out means you're moving from the October expiration out to December. You rolled it out two months further out in time, rolling down and out. That's what it means. So the key here always is that you want to sell the new put option for at least the same or higher than what you have to buy back the original position. Now, come December, if the stock is above $40 a share, this $40 put option will completely expire worthless. You'll get to keep the whole $1.05 per contract. But you have to minus out the 50 cent per contract loss that you took on the original position. So net overall, it's a 55 cent per contract win. The original position, you took a 50 cent per contract loss, because you originally sold your position for 50 cents of contract, you had to buy back for $1. So that's a 50 cent per contract loss. But you sold the new one for $1.05. You managed to retain and keep that whole profit. So $1.05 win minus your 50 cent original loss nets out to a 55 cent per contract win. So in the end, it's a winning trade. The only issue here is that you have to lengthen out the trade by two months. So you have to stay in the trade for an extra two months. Originally, you thought you'd be out by October, you had to roll down and out. So now you're in December. So now you have to wait an extra two months. Okay, we scroll down a little bit here. So rolling allows the investor to lower the potential buy-in price at the sign. Remember, when you sell a put option, one of the things that could happen is that you could end up being assigned the shares at that strike price. Okay, so if your original position was selling a $50 put option, if the stock falls below 50, you're going to be on the hook to buy those shares at $50 a share by rolling down to the $40 put option. Now you've, now you're potentially having to buy shares at $40 instead of 50. You just lowered your potential buy-in level by $10 a share. That's a big move. That's a, that's a, that's a, that's a big cushion you just saved yourself. And it also allows you to lower your maximum risk in the trade. Instead of buying at 50 and exposing yourself to $50 of risk, if the stock goes to zero, now you're only exposing yourself to $40 of risk. So rolling down and out lowers your potential cost basis and it lowers your potential maximum loss, a maximum risk in the trade. Okay, now rolling, if you, you really want to roll, if you feel confident in the trade, you just think, you know, the stock's taking a temporary dip and eventually it'll move back higher. Rolling is a great way to help repair and or, you know, give yourself a defense strategy. All right. So, and the last thing here is that it's best to execute the roll as a single spread trade. You got two, you got two trades going on. You have to buy back your original position now you, and then you have to sell a new one. So instead of executing two separate trade transactions, you can do it all in a single spread transaction. So you can get it all done in one shot. That's the best way to do it because if you try to do two separate transactions, you open yourself up to slippage, slippage is when, you know, you execute one trade and then you're fumbling around with your trading platform to get the next trade ready. And all of a sudden the market moves on you in between that very short period of time. It happens. You could end up executing that second trade at a worse price than what you originally planned for. So you want to skip the slippage issue. Okay. It's called slippage. And you want to execute both trades in a single spread transaction. What I'm going to show you next is how to do that. So we're going to go into interactive brokers. And this is the interactive brokers platform. One of the versions of interactive brokers platform. This is the classic TWS. They call it Trader Workstation TWS. And here's how I'm going to show you how you can do a role in a single spread transaction. Let's just say that you had an Apple trade on, Apple put sell that you had. And in interactive brokers, we want to get a price for Apple. So if you've never used interactive brokers before, or if you use a different broker, it's pretty much the same. You can do a spread trade in any broker, but we want to get a stock quote on Apple itself. We always want to know where the stock is trading. So I typed in Apple and here's where it closed Friday, yesterday, October 8th, 2021. Here's where it went out bid NAS price. Now, in order to create the spread for the two transactions you're going to do, we're going to create a spread line and options spread line. So you type in Apple again, if you're using interactive brokers, and you go down to combinations here. After you hit the enter button, it'll bring up this drop down menu. So you go to combinations, and we want to use an options combo smart directed, which means the software itself will send your trade to the most, to the option exchange that's got the best prices. There's like 12 different options exchanges and the computer, the software will know where to send your trade to. So we click on option combos smart. And it's going to bring up another window that allows you to pick the options strategy that you're looking to do. Now it won't, it won't have a role option in here. And I think in another part of interactive brokers, you can choose the if you want to close the the original put position, you can choose a role. But here I want to show you how to actually get a quote for, you know, what you can sell one for sell the new one for and buy the original back. So in the in the strat, there's three tabs up here, you stick on the strategy tab, and you click down this, this down arrow, and it'll bring up all these different strat options strategies that you can choose. But in this case, we're looking at a diagonal spread diagonal means you're, you're, you're trading one option in one expiration date at one strike price. And you're going to choose a different option for a different expiration date at a different strike price. Okay, so buy or sell combo doesn't really matter. We're going to put on sell at this point. So what you do is here, you're going to select puts now, whatever how many contracts you have is what you want, you always want to do a one to one, if you've sold five contracts of the original position, now you want to sell five contracts of the new position, right, you want to have the contracts the same ratio. So in this case, let's let's change this to buy since we have to buy back the original position. So we're going to buy the original position back, let's just say it's the October 15. Okay, and we're going to sell a new one, we're going to sell let's choose the December, like we're looking at this fictitional trade before. And let's just say you've originally, you want to buy back the original position, which is your 50 put. And let's see what the 40. Let's see, hang on for one second here. Sorry about that had a little issue here with the connection. So we were talking about selecting. So in this case, since Apple is around $142 a share using these strike prices, we have to choose different strike prices than than the example I gave. So let's just pretend we we had we were using a different strike price within Apple. Let's just say we had to buy back the let's go to current price around $142. So that's the strike price. Let's just say you had originally sold 142 put for Apple, Apple stock stock starts coming down, you want to roll the trade. Now you're going to buy back here, you see you buy back the October 142. And let's just say we want to try to sell. And typically we should look at the option prices beforehand. But let's just put in the 120 put for now. That'd be another 40 $22 buffer. And let's put click on add here. Now I'm not I don't know if these prices are are these strike prices are going to satisfy what we're trying to do. Let's just take a quick look here. Click on add. And what it's going to do is, and then these other boxes pop up, you can just close these out. Now what you've done here is that you've created a spread line, a spread quote for the the the both legs and it shows you both legs as well. Unfortunately on Saturday markets closed, so it's not going to give a bid and ask for the spread price. But actually we picked the right numbers here. You can see the October 142 put these are the ones that you want to buy back. Okay, you're going to roll it but you have to buy the original back. The 142 puts went out $1.21 bid at $1.26 ask on Friday yesterday. And the the 120 puts are worth roughly the same 121 at 125. So this spread line right here where there's there's no bid and ask it would really probably show, you know, like a negative five cent bid at a positive five cent offer, meaning the fair value is right in the middle at zero. The way that you can find out what a spread is worth is you subtract the bids from each leg and you subtract the ask prices from each leg. Each one of these strikes is called a leg whenever you do an option spread. It's called a leg. Okay, so the 142 put leg has a bid of 121 at 126 and the 120 put leg has the same 125 121 at 125. So if you were to do this spread, you can do it for zero for a scratch like no cost. Meaning you're going to buy back, you're going to try to buy back the 142 puts for maybe $1.20 through your contract. And you're going to sell you're going to try to sell the new 120 puts for the same price $1.23 contract. So you don't have to do two separate transaction during the market trading day. You would see the spread price here and all you have to do is click on the spread price. So let's just say we can we want to invoke the trade. I'm going to click on the bid column of the spread line here. If I click on it, it's going to bring up a new window. So now this is how you actually engage the trade, the spread trade. It's telling you what you're going to do. Now what you want to do is so it has the combination here that we don't want to sell the October's we want to sell the December's. So let's dismiss this for now and see what we got here. We want to let's let's click on the the ask column here and it'll probably flip them around. Okay, so now before you invoke the trade, it tells you what you're going to do. You're going to buy one of the October puts, the 142 puts. That's what we want to do. We want to buy back the October's and we want to sell the December 120 put. Okay, that's what we want to do. And we want to do it for zero. We want to do it for zero. They're not giving us a choice for zero. What we want to do is for let's just do a one cent credit then. Typically you can do a scratch trade. I'm not sure why it's not giving us the chance to do that. Okay, now what you can do is let's click on preview and make sure it comes out to what we want to do. You don't have to worry about this yellow stuff here. So you're going to buy the 142 and you're going to sell the 120 put. In this case, the one cent means we're going to buy the whole spread back for one cent debit. So that's not what we want to do in this case. Let's close this out and do the one cent credit. We're going to try to get an overall credit. Let's take a preview. Okay, so here we go. We're going to buy the 142 put back. We're going to sell the 120 put. We're going to get a credit. C is for credit. Green C means we're getting money into our account. That means in this case we're going to sell the 120 put for one cent more than what we have to buy back the 142 put for. Essentially a scratch trade. If I was able to put it in zero, I would have put a zero in there. So we're not going to invoke this trade. And here down here it tells you what's going to happen with your money. There's basically no change with commissions. It's going to be negative $2. Your account will get hit with commissions. So basically what we're doing is we're buying back the 142 put and we're selling the new 120 put for basically a scratch trade. Doesn't cost us anything. It's really a scratch trade. So we get rid of this. So that's how you create the spread within interactive brokers. And there's other ways you can do it through the option chains. I like to do it this way. Bottom line is I just want to make sure you understand how to make the trade. You're buying back the original. You're selling the new one. You want to get at least a scratch or a credit when doing the whole spread. You want to sell the new one for the same amount or higher than what you have to buy the original back for. So in this case what will happen is let's go back to our our document here and in the Apple case. So buying back the 140 put and selling the 120 put for scratch. So all that means is that you've closed out your original I'm sorry the 142. You're closing out your original 142 put that trade is done. What you've done is you've lowered your risk in the trade. You've given yourself 22 more dollars of cushion. So if Apple's at 142 now now it has to drop all the way down to 120 in order for you to get into another scary position unless you're you know you're really interested in buying Apple for 120. So you've just reduced your cost basis you're buying level by $22 a share and your ultimate risk in the trade is dropped by $22 a share. Okay so that's what you can do now if Apple once Apple turns around and starts going higher again the 120 put will start to decline in value and eventually if it expires worthless you'll come away with the same original credit that you would have gotten from the original selling 142 put. That's the reason why you want to sell the new one for at least the same amount that it cost you to buy back the old one. I know it sounds a little confusing but overall you want to credit or at least scratch and you've lowered yourself your risk by $22 a share. That's a pretty good thing. All right so that's how you can repair or at least keep yourself in the trade defense mechanism by rolling a put option. So I hope that's been helpful to everybody. Let's take a quick look at our website here. Let's take a quick look at our smart option seller website not that. Here we go. If you want more information on how to sell put options why we love selling put options and even I talk about rolling position as defense mechanism go to our website smartoptionseller.com and click on our put selling basics right along the top here put selling basics you'll be able to put your name and email address in the box here. We'll send your free copy of our put selling basics guide read all about it and at the end of this video here I'll put up an older video that I did a couple months ago on rolling the trade as well so you can watch not only this one you can watch an older one that I made about the same strategy. I may have said something a little different in the other one but it just reinforces the strategy okay and if you want a little bit more about what we do here you can go to our services tab and we have our two newsletters and we have our coaching sessions if you need a little jump or help to get yourself to that next level of options trading we're here to help so I hope this video has been helpful give me a thumbs up leaving a comment I love hearing from you send me an email if you wish I'll always try to answer your emails and that's pretty much it for me today I hope everyone has a great weekend and don't forget to subscribe to this channel hit that red subscribe button in the bottom right hand corner of this video all right everyone have a great weekend and I'll see you all next Saturday hopefully this is Lilo signing off