Step 3 C- Rollover Options Adjustments Strategy
Welcome to yet another important article in the segment of options trading strategy. Have you seen an alligator rollover? Whenever you thread an alligator, the alligator rolls over till the time it gains a winning position, and the same way in the stock market, there is something called rollover adjustments and I am going to tell you how using the rollover adjustments, you can gain a winning position even the market goes against you.
So, let's start with the logic. So, logic is very simple. Just understand suppose you are standing on the beach, okay and all of sudden, you start feeling that there is high tide. So, what you'll do? You will shift yourself to a higher position right so that you are not going to be impacted by high waves. The same way you are in the market and you feel the market is going against you and soon it's going to sink your positions which means your positions are going into losses.
So, what you're going to do? You will roll-up. You will go to higher positions higher you can say strike prices so that you can save your position and what you're going to do till the time you will keep moving up and till the time you get a winning position like an alligator’s rollover. So that is the basic logic behind this rollover. Now the same next topic is situations.
So, like most of the adjustments, the situation, in this case, happens when the market is moving against you okay and always there is an underlying belief whenever we do adjustment as I told you in the first article that we believe this is a temporary move. This is not a permanent move. If it's a permanent move, then there is no point doing adjustment better accept losses and exit but if it is a temporary move that means it is temporarily going up or down and then the market would retract back, then only it is going to make sense.
For example, suppose in the first example I have given you if high tides are going up and up and you are going like on higher positions but suppose that high tides become like a cyclone Okay. So, definitely, even you are standing at a cliff and maybe if there are very high tides like 20 to 30 feet, definitely it is going to impact right. Same here, we are expecting it is a temporary move, temporary volatility and then the ocean will cool down and we will protect our positions. Now, then let's understand different types of rollover for example.
So, the first is horizontal versus vertical. So let's understand what is horizontal and vertical? So, vertically if I call, it is the same simple concept like we have to go up or we have to go down. Suppose we have sold call options, then we have to go on higher strike prices and if we have sold put options, we have to go lower strike prices and we are going in the same month same period, then it is called vertical. Let me take an example so the option chain for nifty for 31st December and just assume that we have taken a position at say 13500.
Here, the market keeps moving up and our premium is increasing then what we can do, we can sell our position at thirteen thousand five hundred and we can buy at thirty thousand six hundred or thirty thousand seven hundred any position which we feel like safe and the market will not go that location at least in a given period. That means before what is our thinking as before thirty, first, the market will not go say thirteen thousand seven hundred. So, we will sell our position and will book our losses here at thirteen thousand five hundred and we'll make another position at thirteen thousand seven hundred.
This is in the case of call and the same in the case of a put. Suppose we have sold something at thirteen thousand and the market start moving down then what we can do? We can sell at 13000 and we can exit at 13000. We are selling options so we already sold at 13000. Our premium has been doubled upright and we are in losses.
So, what we'll do? We exit the position and we'll create another position at 12750 right and we'll keep moving downward and upward till the time we gain a position where we can make a profit. So, of course, we have booked some losses here but we'll make a profit once the market will not move in our you can say next position. So, the next position we have taken suppose market just remained at 13600 uh before 31st December.
So, we are going to collect all the premium. So that's logic about vertical. So vertical is going up or going down in the same month. Same way if we have to go next month, next calendar, that is called horizontal. So, what I am going to tell you? I feel that the market is going now at 13500 but it is a temporary phase. It will go back, it will retract back, it will not be able to keep at 13500. So, what I can do? I can sell my position in December month and I can get the same position 13500 but in a different month in January or February or any other month.
So, I’m maintaining my position. Only I’m changing the month. I’m buying more time because I’m feeling in short term maybe the market will move but in long term, the market will retract back correct and then I will make a profit so that's two kinds of uh you can say rollover, horizontal and vertical. So, vertical generally in the same month we make when we feel that it is so temporary that within this period also itself, the market will go back and will retain our position and horizontal when we do when we believe that in short, the market will move up and the market may be volatile but in long term, the market will correct and it will retract so that's the basic rule. I hope you enjoyed the article.