Based on the provided reference describing a specific options strategy, rolling a straddle involves closing the existing straddle position and then selling a new straddle. This process is part of a dynamic strategy where adjustments are made as the market moves.
Understanding the Process
In this particular strategy outlined in the reference, rolling isn't a single, atomic transaction that modifies the existing options contracts. Instead, it's a two-step action repeated over time:
- Initiate the Position: The process begins by selling an At-The-Money (ATM) Call European option (CE) and an ATM Put European option (PE) simultaneously at a specific time, such as right after the market opens. This initial action creates the straddle position.
- Market Movement & Adjustment: As the market price moves a certain distance away from the initial strike price, the current straddle position is adjusted.
- The "Roll" Action: The reference states, "As the market moves some distance, we close both the legs and sell another straddle." This means:
- You close the original ATM Call and Put legs. If you initially sold them, you would buy them back.
- You then sell a new ATM Call and Put. The "ATM" level will now be relative to the current market price, which has moved.
This sequence of closing the old position and opening a new one is what constitutes the "roll" in the context of this strategy.
Steps for Rolling a Straddle (as described)
Based on the strategy mentioned, the steps involved in this type of dynamic rolling are:
- Step 1: Open the initial straddle. Sell an ATM Call and an ATM Put at the start of the trading period.
- Step 2: Monitor market movement. Watch how the underlying market price changes.
- Step 3: Close the existing straddle. Once the market moves a specified distance, buy back both the Call and Put options that you originally sold.
- Step 4: Sell a new straddle. Immediately after closing the first position, sell another ATM Call and ATM Put based on the current market price.
- Step 5: Repeat. Continue steps 2-4 as the market moves, until the trading period ends or a strategy-specific stop loss is reached.
This method allows the trader to continually re-establish a straddle position centered around the current market price, aiming to profit from time decay while managing directional risk through repeated adjustments.
