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[Editor’s note: The original article led to an interesting exchange between the author, Tyler Craig, and Mark Wolfinger, who has also written about option trading on MoneyShow.com. It adds further explanation of the option trading strategy, so we have re-printed it here.]

Mark’s response:

“I agree with the idea that vertical spreads (both debit and credit) should be in every trader’s strategy arsenal.

However, using a “down and out” roll as an example of a good method for maximizing profits doesn’t work for me. Rolling out should not be considered as a risk management tool.

In my opinion, what you really did was make two trades. You took your profits in the front-month trade and then decided to open a brand-new position (unrelated to the spread just closed).

The differences in our points of view may be subtle, but during my 36 years of options trading I’ve discovered that most folks who adopt the down and out strategy make poor trade decisions because they structure the new trade based on the price of the position being closed. It is far more efficient to make a clean exit. Then decide which (if any) spread to own for future gains.”

Tyler’s response:

“Good to hear from you, Mark. Thanks for the input. I pretty much agree with your points. Here are a few additional thoughts:

1. Keeping in mind that the objective is to maximize gains and that my expectation is for the underlying trend to persist, I much prefer the closing of the existing debit spread when the majority of profits are captured (and the remaining risk-reward is unfavorably lopsided) and opening up a new spread offering a better risk-reward versus remaining in the initial position. Because it reduces the capital allocated to the trade, I think we could easily make the case it reduces risk (even though the new trade may be a lower-probability bet).


2. I agree that the new spread should be opened up based on its own merits, not based on the value of the initial spread when exited. Whether or not a trader employs a roll order where they simultaneously close one spread and open another, or simply exit the first trade and take some time to reassess before re-entering the next debit spread, doesn’t make much of a difference. The net result is the same. They’ve effectively “rolled” from one spread to another.


3. I also agree I simply made two separate trades. If traders confuse that reality when they start using rolling orders, then I too would encourage them to simply close the initial trade and reassess before taking further action.”

By Tyler Craig of TylersTrading.com