Does selling the new option for two erase the old two-point realized loss?
Reveal the worked answer
No.
It creates a new obligation and separate future result.
Core Options · OPT-19 · Core
Rolling honestly
Why does a new credit not erase an old loss?
What you will learn and prerequisites
- Explain the mechanism in the lesson question.
- Reproduce the worked comparison and recognize its failure case.
Read first: Read a contract and its premium, Rights, obligations and expiration, Defined payoff risk is not margin, Read the whole multi-leg ticket
A roll closes an existing position and opens another. It creates two records: the result on the old trade and the economics of the new one. Net cash from the combined order can conceal that distinction.
A later expiry or extra premium is not itself a repair of the original thesis.
Understand the mechanism
The new contract changes strike, duration, obligations and sensitivity. Additional credit often accompanies additional time or risk. Costs, taxes and assignment considerations can differ by account.
Evaluate the new position as though starting today rather than requiring it to rescue the old one.
Walk through the process
Record close and open transactions separately, then net them only for cash flow. Recalculate maximum risk where defined and stress where not. State why the new exposure is attractive on its own.
Avoid using rolling to turn a planned short-term trade into indefinite risk.
Contract and decision boundary
Terminal examples use simultaneous intrinsic realization of all stated legs, before unspecified costs. Actual American exercise, assignment, early liquidation and broker handling can create different interim cash needs. These fictional comparisons are education, not orders or personalized investment advice.
A worked example
A fictional option was sold for one point and is bought back for three, realizing a two-point loss. A different option is then sold for two points.
Across all three cash flows the net is zero, but the account now has an open short option liability. It has not recovered the realized 200-dollar loss economically merely by receiving new cash. The chart is a cash ledger, not a profitability chart.
Rolling honestly—worked comparison
Vertical: Cumulative cash (USD), not total wealth
Horizontal: Initial sale / old close / new sale
1. Fictional example
Read the graph as a data table
| Initial sale / old close / new sale | Fictional example |
|---|---|
| 1 | 100 |
| 2 | -200 |
| 3 | 0 |
What would invalidate the reading?
A trader labels a roll 'no loss' because it collected a credit, ignoring the old realized loss and the new liability.
Check your understanding
Try the question before revealing its answer. These are reading checks, not trading certification or a site completion record.
What is the critical failure to avoid?
Reveal the worked answer
A trader labels a roll 'no loss' because it collected a credit, ignoring the old realized loss and the new liability.
Explain this risk before treating the example as a decision rule. A correct calculation does not guarantee a favorable market outcome.
Return to the question: Why does a new credit not erase an old loss? State the observed facts, the assumptions and the failure condition separately.
Sources, assumptions and downloadable script
External references support definitions and conventions. Worked scenarios and prose are original. No current quotes or dealer inventory are claimed.
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