What is Rolling an Option?
Rolling options involves closing an existing option position and simultaneously opening a new one in the same underlying security. This can be done to:
- Extend the expiration date – this is the most common reason to roll and option, when a trader has a longer-term time horizon than the option expiry but is forced to open a position in the shorter dated options due to the liquidity of short-dated options. This is very similar to rolling futures contracts to extend the duration of a trade.
- Change the strike price – traders will often change the strike price as they extend the expiry date (typically increasing the strike for a call, and decreasing the strike for a put for a neutral position). Changing the strike price, can manage risk or capitalize on market movements.
- Adjust the position size – rolling a position is an opportunity for a trader to lock in some of the gains while maintaining the current position. This is typically done by rolling to a different strike price after the option value has appreciated significantly.
- Collect additional premium – For options sellers, rolling can be a way to collect more premium, potentially widening the break-even point of the trade
- Avoid assignment – for options with physical delivery, especially commodity options, traders will seldom want to take delivery of the physical asset and will usually roll the option contract to avoid an expiry triggering a delivery.
Types of Rolling
- Rolling Out: Extending the expiration date
- Rolling Up: Moving to a higher strike price
- Rolling Down: Moving to a lower strike price
- Rolling Out and Up/Down: Changing both expiration and strike
Rolling Out a Covered Call
A trader owning 100 shares of AAPL stock trading at $150 per share. You sold a covered call with a strike price of $160 expiring in 30 days for $3 premium
As expiration approaches, AAPL is trading at $155. To avoid potential assignment and collect more premium, the trader can elect to roll out :
- Buy back (close) the current $105 call for $2
- Sell a new $160 call expiring in 60 days for $5
Net credit: $3.00 ($5 – $2). This roll extends your position by 30 days and collects an additional $3.00 premium, further lowering the stock cost basis.
Rolling Up
Rolling up is typically done to adjust a position for changing market conditions or to capture profits while maintaining exposure.
For example, a trader is long Tesla (TSLA) $250 calls and TSLA stock is now at $260. You could roll up by:
- Selling your $250 calls for a premium of $10
- Buying $270 calls with the same expiration for a premium of $7
The trader is thus still maintaining a bullish stance on TSLA stock and has realized $300 of profit per option.
Rolling Down a Cash-Secured Put
You sold a cash-secured put on Docusign (DOCU) stock with a strike price of $50 expiring in 45 days for $2 premium. DOCU’s price drops to $45, making the put option in-the-money. To reduce potential losses, the trader can roll down by:
- Buying back the $50 put for $5.50
- Selling a new $45 put expiring in 45 days for $3.50
Net debit: $2.00 ($5.50 – $3.5. This roll reduces the strike price, lowering the breakeven point and potential loss.
Rolling Out and Up a Long Call
You bought a call option on ZOOM (ZM) stock with a $60 strike price expiring in 30 days for $3. ZM’s price rises to $65, the trader stills believes there is more upside potential. To capture these gains, the trader can roll out and up:
- Sell your $60 call for $6
- Buy a new $65 call expiring in 60 days for $5
Net credit: $1.00 ($6 – $5). This roll the position, increasing the potential profit if ZM continues to appreciate, and also provides a small realized profit.