Time / Diagonal Spreads – Rolling the Position, Call Spread and Put Spreads – Rolling the Position

Rolling the Position

Time spreads are unlike all the other strategies we have

discussed before when we talk about rolling or continuing the

position. In other strategies, the option component is limited

to a single month. At expiration, the position disappears. It

either transforms into stock or expires worthless leaving you

with no option position. It is different in the case of a time

spread because you are dealing with two different expiration

months. After the front month expires, in addition to a

potential stock position, you will still have an option position

– the out-month option will still have time until expiration. To

properly roll that position, you must first understand the new

position you have inherited.

Rolling the Call Spread

Let’s look at the call time spread first. For the purposes of

our example, let us pretend we are long the September / October

25 call spread. If the stock were to close below $25.00 on

expiration Friday of September, the September 25 calls would

expire worthless and you would be left with a long October 25

call position. From this position, you would have several things

that you could do.

First, you could just sell out the October 25 call. Hopefully,

the combination of the expiration of the September 25 calls and

their subsequent worthlessness along with the proceeds gained

from the sale of the October 25 calls after September expiration

might make a profitable trade.

You could keep the position open and continuing in several ways.

You could stay long the October 25 call naked. You could sell

the October 30 call and become long the October 25 / 30 vertical

call spread if you are bullish. You could sell the October 20

call and become short the October 20 / 25 vertical call spread

if bearish.

You could buy the October 25 puts and become long the October 25

straddle if you felt the stock would become volatile. You could

even sell the stock and create a synthetic put if you were very

bearish. There are ways to create a new position that reflects

any possible future outlook an investor can have.

If the stock were to close above $25.00, then the September 25

call would close in-the-money. At that time, you would be

assigned your short September 25 call and that would translate

into a short stock position. That short stock position that you

received from the assignment of your short September 25 call

along with the remaining October 25 long call position is the

equivalent of a synthetic put. At this time, you could close out

the position or keep it.

The position is a bearish one so if you felt the stock would be

heading down, you could keep the position on. You could sell

another option of a different strike to set up either a bull or

bear put spread. You could buy the October 25 call to create a

long straddle. As you see, there are many different combinations

that could be created.

If you were short the September / October 25 call time spread

and the stock expired under $25.00 on expiration Friday of

September , then you would have a remaining position of a short

October 25 call naked. Again, there are many potential ways of

continuing the position. Of course, you could always buy back

the naked call and close the position if you no longer wanted to

maintain a position in the stock.

If you did, you could buy a call in the same month and create a

vertical spread, sell the corresponding put and create a short

straddle, buy the stock one to 1 and create a buy-write or other

combination based upon what you felt the stock would do.

If the stock closed above $25.00 and you were short the call

time spread, then you would be left with a long stock position

from your long September 25 call and short the October 25 call

against the long stock position. The position you would be left

with is a buy-write. Depending on your outlook for the stock,

you could keep the buy-write on, take it off, or use other

options to change the position to what you want it to be.

Rolling Put Spreads

As far as put spreads, let’s take an example and see where we

are when the front month option expires. We will use the

September / October 25 put spread for our example.

When long the spread, and the stock closes above $25.00, the

September 25 puts, which you are short, will expire worthless

leaving you with a long naked put position. From that position,

you can close it or combine it with other option or stock to

create a different position. Again, there are many different

possibilities.

If you were short the put time spread, and the stock closed

above $25.00 then the September 25 put, which you are long, will

expire worthless leaving you with a short naked put position in

the October 25 puts. This position can be closed out or combined

with other options or stock to create a strategy that will take

advantage of the outlook you have on the stock.

When the stock closes below $25.00, the scenario is different.

When long the spread with the stock closing lower than the

strike price, the front month put which you are short will be

assigned to you thus making you long stock in addition to your

long October 25 put. This position is known as a synthetic call.

As before, there are many ways to combine other options and/or

stock to change the position so that it is in line with want it

to be going forward.

If you were short the spread, and the stock closed below $25.00,

then you would exercise your long September 25 put making you

short stock and short the October 25 put. That position, which

is called a “sell-write” (the sister strategy to the buy-write),

can be kept as is, closed out, or changed in different ways by

combining it with stock or other options based upon your

expectations of the stock’s future movements.