When a stock moves against us we have a number of defensive strategies that we can use to help reduce or prevent a loss. One of them is to rollover a spread. In doing this, we simply close out the current month, and open up a new credit spread in the next month. The advantages for doing this are:

• Helps prevent a significant loss.
• Maintains the possibility of a profit in a rollover.
• Allows us to move the strike prices up or down. This gives us more breathing room in a spread.
• By staying in the same stock, it allows us to take advantage of the increased premium for the new spread.
• Increases probability of success. The stock has probably already made a significant standard deviation move against us, odds are that it will reverse course or at least consolidate. This obviously depends on the reason for the stock moving against us.

The main disadvantage of rolling a spread is that it will tie up our funds for more than one month. Although we do not like to roll positions, sometimes it's the best way to prevent or reduce a loss. We would rather lower our return in the spread and preserve our trading capital than to take large losses.

There are numerous things to take into consideration before rolling a spread. The most important is trying to figure out why the stock moved against us in the first place. This will likely tell us whether the move is a short-term or long-term move and if the trend in the stock has changed.

When rolling a spread, the following are important to follow in order to do it correctly.

• Closing out the old spread and opening a new one.
• Not taking the full loss in old spread.
• Timing......you must close the old one and open the new one at the same time.
• Picking good areas of support and/or resistance for new spread.
• Having the correct direction of the stock or at least where it is likely not to go.

Let's take a look at a rollover from our trading history. On February 15th, we entered a 130-120 Bull Put Spread for the March cycle. Everything appeared to be sitting in good shape with nearly a 30-point cushion on February 26th.

However, the Market correction started on the 27th and it took ICE down with it. The stock continued to fall and eventually dropped below our $130 strike price. Because we believed that this was a short-term correction and was more related to the overall Market than just ICE, we decided to roll the spread. Whenever we are getting close to taking action, we will send the members a plan for the following trading day. We sent out the following plan for this position:

PLAN FOR WEDNESDAY

ONLY if ICE

falls below $127

Closing Current Spread

Buy 10 Mar. 130 Puts (previously sold)

Sell 10 Mar. 120 Puts (previously bought)

Opening New Spread

Sell 20 April 110 Puts

Buy 20 April 105 Puts

We closed out the 130-120 March Bull Put Spread for a loss (debit) and opened up a new 110-105 April Bull Put Spread for a credit. The difference in the cost of closing out the March spread for a debit and opening up the new April spread for a credit resulted in a profit potential of $400 on the overall trade.

One thing to note is that our original spread only had 10 contracts while our April spread had 20 contracts. This was because we switched from a 10-point spread to a 5-point spread. In this spread, your broker would require the same amount of funds for either spread. For more information on how this is figured, you might want to read "Figuring Account Maintenance." This is listed under "Account Requirements for Trading."

By making this adjustment, as long as ICE stays above our $110 strike price at April expiration, we still would maintain a profit in this spread. This was possible even after the stock moved against our original position.

In this case, ICE consolidated in the area of $120 and then started to climb. Although we extended the trade into two months, we were able to maintain a profit in the spread.