[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.]
“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.”
“Good to hear from you, Mark. Thanks for the input. I pretty much agree with your points. Here are a few additional thoughts:
By Tyler Craig of TylersTrading.com