The rolling delta trade fades the primary trend. It is used as a low cost high percentage return trade for stock (not ETFs typically) which have huge extensions. Using the primary and/or secondary extension involves constantly increasing, or maintaining, delta against the trend. Delta management can be used via purchase of shares or options, but the rolling delta trade utilizes options only. It utilizes "out of the money" options with a consistent position size. In place of increasing the position size, by adding larger lots, or smaller increments of entry, it increases or maintains delta by vertically rolling your options. The options are purchased "out of the money" with plenty of time on them. The moves we are looking for on these plays are typically fairly large, hence they may take some time to deliver. The options are purchased with a strike price near the deleverage area. As the extension continues and price moves against you, you roll the strikes up to the next strike level at a decreased cost. Rolling the contract means you sell the currently held contract while simultaneously buying another strike. A vertical roll is in the same month, a calendar roll is the same strike with different expiry months. A diagonal roll is a combination of both, change in strike and in month of expiry. The rate at which you roll the strikes is dollar for dollar of the underlying, thus the more you are required to "roll up" the options, the more distance from top to reset you will capture. For instance, if you were to initialize a position (say shorting an incline) of 5 115.00 put contracts of XXX at 125.00, the next strike up to roll is to 120.00. The delta adjustment comes incrementally as the underlying rises in price. Rolling evenly keeps the profit area upon retracement even throughout the trade. If we entered at 125.00, and bought (5) 115.00 puts, we would roll one option to a 120.00 when the underlying reached 126.00, the next at 127.00, and so forth. Once the underlying reaches 130.00 all 5 contracts are now rolled to 120.00 puts. You will see that the pricing difference between the current trade price and the option strike has not changed (being 10.00), but, on the other hand, the price range from the top of the extension to the reset point has increased. Upon reversal of the underlying, the delta will throttle forward and gamma will assist in accelerating the positive effects ofdelta on the trade. During the entire trade, theta needs to be kept minimal by keeping our options out a few months. When calculating estimated returns on the trade, I like to calculate for pure intrinsic value only at reset. If the rolling delta trade goes on for quite some time, you may have to roll out in time also. Eventually, if the run is taking an extreme amount of time, and moves against you in a big way, you may have to add a few contracts to keep the reset level in profit.
Stocks which are extended 60-70% and beyond work best with this method. This is also why ETFs are not a preferred play with the rolling delta trade.
