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I've got a situation(s) where I need to roll deeper in the money call options further out in time. It's tempting to want to sell at a given point, perhaps on a limit order, and then buy later, hopefully around the same price (or less). Since rolling out further in time, I have to pay more time premium, but since the options are deep enough in the money and have very little time premium to begin with (e.g. on SLV the $24 Feb 18 options are $6.50 at time of writing -- Jan 20 -- and only have about 0.10 cents of time premium), it seems like the time value / premium isn't much of a factor.

I.e., options like this fluctuate much more in a given day (0.50, $1.00 or more), than their time premium.

I may begin to hold longer term deep in the money options, rather than rolling every month, am but not sure. I really need some advice on strategies here to roll. It seems like it would be nice to make a little money on the roll, given the high variation of these daily. Perhaps I need to do in a set of orders (I have low commissions, so I'm not worried about that). Perhaps it's best to do at a certain time of the day (e.g. afternoon), when things are quieter, or perhaps take try to take advantage of a nightly swing, but that can be double edge sword. Are there "statistics" or equations that can help this? Does "dollar cost averaging fit in at all"?

FYI am rolling GLD and SLV right now, both pretty deep in the money, relatively little time premium compared to daily fluctuations.

Thanks

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I think your best strategy is to learn more about the behavior of what you're investing in. Learn everything you can about it. Specialize in it. The more you study, the more the proper strategy will present itself.

Answer the questions you ask in paragraph 3 through your own study.

  • Mbhunter your answer turned out to be what I did, and still have more to do with learning Bollinger Bands or whatever else to better understand the likely near term price movement. Perhaps you have some suggestions on the answer I posted, or something specific to offer on GLD or SLV or AAPL? – Ray K Jan 27 '12 at 22:53
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So far the answer is:

  • observe the general direction of the market, using special tools if needed or you have them available (.e.g. Bollinger bands to help you understand the current trend)

  • at the right time per above, do the roll with stop loss in place (meaning roll at a pre-determined max loss), and also a trailing stop loss if the roll works in your favor, to capture the profits on the roll.

This trade was a learning experience. I sold the option at $20 thinking I'd get back in later in the day with the further out option at a good price, as the market goes back and forth. The underlying went up and never came back. I finally gritted my teeth and bought the new option at 23.10 (when it would have cost me about 20.20 before), i.e. a miss/loss of $3 on $20. The underlying continued to rise, from that point (hasn't been back), and now the option price is $29.

Of course one needs to make sure the Implied Volatility of the option being left and the option going to is good/fair, and if not, either roll further out in time, nearer in time, our up / down the strike prices, to find the right target option. After doing that, one might do the strategy above, i.e. any good trade mgmt type strategy: seek to make a good decision, acknowledge when you were wrong (with stop loss), and act. Or, if you're right, cash in smartly (i.e. trailing stops).

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