Naked Put Options - To Roll or Not To Roll...
That is the question!
In general I have two sets of rules, one set being rather quantitative the other qualitative. My qualitative rules for rolling are pretty straightforward.
1) Do I want to own the stock?
1a) Do I want to own the stock at this price?
2) What is the nature of price action (is this stock selling off with the market? Is it due to some structural change in the fundamentals/company etc)?
I don't advise selling naked puts on stocks you don't have confidence in or want to own. While it can be a great opportunity to play on volatility reversion, I don't want to get stuck with a stock that I don't have confidence in (and I've made this mistake before).
So this generally takes care of 1 above.
1a is a little more nuanced. Some stocks recently (writing this as of Feb/2021) have had some pretty massive run-ups and can easily be argued are going to give some of that back. If you're selling puts on a stock that could conceivably have a lot more downside before finding some base of support I take that into consideration if the put is now in the money.
2) Is also more nuanced, if the stock is merely selling off with the market, and not really more than it's beta should imply, then it's probably safe to either take delivery and start writing calls (you did want to own this stock, right?). However, if the stock is really giving up the ghost I would be more inclined to roll the position out and down or take the loss.
The second set of rules are much more quantitative in nature.
1) How far out in time do I have to go to either roll for a break even or a credit and is this worth my time? (opportunity cost). This is pretty straightforward, I look at previous support levels like when I put the trade on to begin with and identify how far out I would have to go to roll the position to that level for a break even or better and unless I have other positions that I want to put on, I will roll it there.
2) If I do decide to take delivery, is the premium in the options worth it? Can I lower my cost basis regularly in doing so? I look at the extrinsic on the options and the ATR (average true range) on a weekly to get a sense for this. What's the premium in the ATM calls for the next expiry compared to the ATR? Is the stock at a level I am comfortable with or is there a lot of air between here and the next level of support? If there's a big gap it's probably NOT possible to write enough call premium to really keep your cost basis in line with a decline and I'd be more inclined to roll out and down.
Lastly, as traders we all have to take losses at some point, there's no harm in doing so if your thesis for the stock has changed or you just don't want to see that ticker anymore.