Rolling a Trade – A Simple Mean Reversion Strategy Management Tool

One thing very common in the world of options trading is this idea of “rolling” your trade.

You can either roll your trade by changing its strike, duration, or both. And the purpose of rolling the trade is to re-position yourself to increase your chance of profit again. Or keep the dream alive that the position will payout.

In our strategy, the concept is the same. We know it’s not uncommon to get caught on the wrong side of monster moves. In these cases, it can sometimes make sense to “roll the trade” to a different “fair value” period.

By doing this, we are typically able to reduce risk by booking profits on our most recent entries and lowering our overall exposure on the pair. This gives us more dry powder to re-add should price continue to run relative to our rolled “fair value”.

The whole point of rolling is to reduce risk and increase the probability of exiting the trade at least at break-even or with a small profit.

Below is an example of a trade I rolled recently on EUR/NZD.

You can see my 3 entries on this pair as price continued to ramp up. On all of these, I was targeting the 200MA as my exit at “fair value”. But price was running pretty hard so it became obvious that exiting at my current target would result in a small loss.

So in order to increase my probability of profit on this trade, I rolled my target to the 4HR chart’s “fair value” (800 MA on the 1HR chart) and closed at about 50% max profit for an overall profit on the position.

Again the purpose of rolling a trade is to decrease risk. You can see by rolling to the 4HR’s “fair value”, I drastically increased the probability of getting into profits on my average entry, because I re-oriented with the market giving myself a large profit potential that will take theta a long time to eat up.

This gives me the ability to turn a profit on the position without needing to deploy any additional capital. In a lot of cases, once you roll, you can usually book profits on your later entries, which will reduce your risk even further and allow you to average down at an even higher price should the run continue.

As with all money management though, you can not roll indefinitely or else you will eventually pinch yourself with too much risk.

Personally, I never roll more than 1 time, and once you have rolled, the real goal of that position is to simply get out at least break even. You aren’t looking to turn a huge profit with the new large spread you have made available. You are looking to extend duration so the probability of you turning this potential loss into break-even or better is increased.

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