Rolling is a method of adjusting options trade by closing existing positions and selling into slightly different new trades. The value of the position closed offsets the price of the new position. Rolling is usually used to avoid assignment losses on short sales, but is sometimes used to increase potential profits on long buys. If correctly executed the adjusted position will succeed at either goal. If poorly executed rolling will compound your losses or erase profits.
The formula for profit from a roll is fairly simple.
There are three ways to roll an options position. The first is rolling out, which moves the expiration date. The second is rolling up, which moves to a higher strike price. The last is rolling down, which moves to a lower strike price. Note that these can be combined: You can roll up and out and down and out.
Rolling out simply replaces a long or short option position with an identical option at a later expiration date. The option type and strike price stays the same. This can be used on profitable positions you think will deliver more profit before their price trends fizzle out, or losing positions that you think will reverse if they have more time before expiration.
Profit Seeking Roll Outs
If you are holding an option strategy which has been profitable, rolling out locks in profits from current options. Purchasing identical options expiring in the future give more room to earn returns if the trend continues into the future.
Loss Avoiding Roll Outs
If you are holding a losing trade that indicators imply will reverse over time, you can roll out the position and wait. If the trend reverses into profitability the loss is avoided. If the trend continues to move against you, you will take more losses than simply closing the position.
Rolling up replaces your current option position(s) with an identical option position at a higher price. The option type and expiration date remain the same. Rolling up avoids assignment risk on short sold calls and takes profit on long calls or short puts while attempting to earn more returns.
Rolling Up Long Calls
Rolling up a long call locks in the earnings from the old call while buying a new long call position. The profits help pay for the new call. If the trend continues, the new call becomes profitable. If the trend reverses the losses from the new call may exceed the profit earned and cause losses.
Rolling Up Short Calls
Rolling up a short call attempts to avoid assignment risk on positions that have moved in the money. Instead of waiting for a potential assignment, the position is closed for a loss. Calls are sold at a higher strike price to cancel out the losses. If the trend stops or reverses, the premiums on the new calls are kept for an overall gain. If the trend continues, additional losses are suffered.
Rolling up Short Puts
Rolling up a short put allows you to keep collecting premium profits as long as the underlying asset’s price keeps rising. You close the existing short position and open a new short position at a higher strike price. This takes profit on previous short puts while gaining income from new short puts, as long as the price keeps rising. If the price reverses and the higher short puts move in the money, the overall return will be reduced or turned into losses.
Rolling Up Plus Out
This play combines the effects of rolling out and rolling up. Rolling up and out moves the option position(s) up in strike price and out in expiration time. Positions which gain from uptrends will have their profits taken and replacement positions may give additional profit.
Positions which suffer losses from uptrends will have their losses finalized while new higher positions are established. If price moves down, you’ll acquire profits from the new positions. If the price continues upward, you’ll suffer additional losses.
Rolling up replaces your current option position with an identical option position at a lower price. The option type and expiration date remain the same. Rolling down avoids assignment risk on puts that have been sold and takes profit on long puts while attempting to earn more income.
Rolling Down Long Puts
Rolling down a long put allows you to take profit from existing put positions while buying puts at lower strike prices. If the trend continues, the underlying price will fall below the strike price of the new put, allowing you to collect additional profits. If the trend reverses, the position will result in losses.
Rolling Down Short Puts
Rolling down a short put avoids assignment on a sold put position. The current short put position is closed while another is open at a lower strike price. If the downward trend continues the short put position will result in additional losses. If the trend reverses upwards the premium earned for your short puts will be permanently kept.
Rolling Down Long Calls
Rolling down a long call sells an out the money owned call and buys a lower set hoping the trend will reverse upwards, eventually exceeding the strike price of the new call. If the price trend continues downwards, you will suffer more losses.
Rolling Down Plus Out
This combines the effects of rolling out and rolling down. This moves the option position(s) down in strike price and out in expiration time. Positions which gain from downtrends will have their profits taken and replacement positions may give additional profit.
Positions which suffer losses from downtrends will have their losses finalized while lower positions are opened. If the trend moves up, you’ll acquire profits from the new positions. If the trend continues you’ll suffer additional losses.
Rolling Multiple Legs
You can roll multiple option legs. Legs are multiple option contracts gathered into one position. Instead of rolling a single option, you must roll all the legs on that side of the overall position. For a spread or one half of a condor, you will close two positions and open two positions. You can roll essentially every options position up, down, or out. When doing so, you should always remain aware of the risk profile resulting from your actions.
Note: you should always complete the roll in a single trade. Legging in and out of any options position gives the price time to move against you. Any play with more than one option should be completed in one trade.
Know why to Roll
There are reasons to roll, and reasons not to roll. You should not roll to evade an unavoidable loss. When you roll a losing position, you take the loss anyway. You must close the first position while opening the second in a single trade, which finalizes the current loss while giving the overall position more breathing room. If you are right, the losses will turn into profit when the trend reverses. If you are wrong on short positions, the trend will continue past the strike prices which mark assignment and further losses. If you are wrong on long positions, they will continue to be eroded by time value while staying beyond profitability.
When choosing to roll, look at the new position from the same angle as a trader with no positions. Based on the economic, fundamental, and technical indicators, would you enter this position if you weren’t rolling? If the answer is no, you should simply close out the losing position and place the money into opportunities which can provide recovery.
One of the best reasons to roll is to lock in profits. This closes a profitable trade while opening a position at a farther date, higher strike price, or lower strike price. Fundamental and Technical Analysis of the underlying investment must heavily imply the new position will become profitable. If it doesn’t, you’re simply exchanging gains for losses.
In the case of short positions, the decision to roll should be made quickly. The deeper a short position moves into the money, the less money you will receive to close. The amount of money you can apply against opening the new position will decrease.
Did we help you? Vote with a Crypto-Donation!
Donate Bitcoin Cash
International Economic Analysis:
- Major Currency Economic Summaries
- Performance of Major Imports and Exports
- Mandates of Central Banks versus Expectations
- Performance Indexes of Major Economies
- Economically Correlated Currency Projections
- Large Funds Currency Sentiment Readings
- List of Technical Indicators to Look For
- Occasional: Foregin Exchange Technicals Markups
American Markets Analysis:
- Summaries of American Economic Structure
- Performance of Major
- Federal Reserve Mandate versus Expectations
- Performance Indexes of U.S Economy
- Economically Correlated U.S Dollar Projections
- Large Trading Fund Index Sentiment Readings
- Market Wide Earnings Versus Valuations
- Fundamental Ranking of U.S Business Sectors
- Best and Worst Future Consensus Estimates
- Occasional: Firm Fundamental Strength Report
- List of Technicals to Look for While Trading
Investment and Finance, Serviced by Amazon
A Concise Guide to Macroeconomics, Second Edition: What Managers, Executives, and Students Need to Know
A Man for All Markets: From Las Vegas to Wall Street, How I Beat the Dealer and the Market
Algorithmic Trading: Winning Strategies and Their Rationale
Alternative Investments: CAIA Level I (Wiley Finance)
Alternative Investments: Instruments, Performance, Benchmarks, and Strategies