Rolling in Options Trading

Rolling is a fairly common technique in options trading, and it has a variety of uses. In very simple terms, it's used by options traders to close an existing options position and then open up a similar position using options contracts based on the same underlying security but with different terms.

Typically, this technique is used to either effectively adjust the relevant strike price of a position or to extend how long you want to hold a position for. It can be used with long and short positions, and it's a technique that most options traders will want to consider at some point. There are actually three different forms: rolling up, rolling down, and rolling forward. On this page we will explain each of them in detail.

  • Rolling Up
  • Rolling Down
  • Rolling Forward

Rolling Up

Rolling up is when you close an existing options position and simultaneously open up a similar position, but using options with a higher strike price. You are effectively rolling the option up to a higher strike price, hence the term. You can do this with a long or a short position, and the process is really quite simply.

You would use the sell to close order to close your position if you were long on options, or you would use the buy to close order if you were short on them. At the same time, you open a new position, using either the buy to open order for the long position or the sell to open order for the short position, on contracts on the same underlying security but with a higher strike price.

The process is exactly the same whether it involves calls or puts, but the effect is different. When rolling up calls you will be swapping your existing position for one involving cheaper contracts. The higher the strike price of calls the cheaper they are. If you are rolling up puts, then you will be swapping your existing position for one involving more expensive contracts, because the higher the strike price of puts, the more expensive they are. Of course, the effect also depends on whether you are long or short.

Rolling up a long call position means a net cash gain, because you will be selling one position and entering a cheaper one. However, if you are rolling up a short call position, then you will have to pay more for the contracts you are buying back than you will receive for writing the new contracts at the higher strike price.

On other hand, rolling up a long put position means selling the cheaper contracts that make up your existing position and buying more expensive ones. Whereas rolling up a short put position means closing your position by buying back the cheaper contracts and then writing more expensive ones. It's not very often that you would roll up when long on puts though.

The technique of rolling up is used for a number of different reasons. It depends on what your existing position is and what the circumstances are. For example, you would typically use the technique when short on calls to prevent assignment of the contracts you have been written.

You might do this if you had written calls against stock that you own because you didn’t expect the stock to increase in price before the expiration of those contracts. To prevent the calls you had written from being assigned, forcing you to sell your stock, you could roll up the contracts to a higher strike price that was out of the money.

If you were long on calls, you might choose to roll up to a higher strike price if the underlying security had risen significantly and your calls had become deep in the money. By doing this you can take the profit from the existing position, but continue to speculate on further rises without risking all the profit you had made so far.

If you were long on puts expecting a security to fall in value, but that security actually went up in value, you might use this method to cut your losses but still speculate on the security falling back down in value. By selling your out of the money puts, you could recover any extrinsic value left in them and then effectively reinvest in puts with a higher strike price – meaning your position would be nearer the money and you would stand to gain more if the price of the security did fall from that point.

It's worth noting that there is risk involved with this technique, particularly in a volatile market or one that is moving quickly in one direction. If the price of options contracts is fluctuating significantly, then the change in prices between closing one position and entering another could have a major impact.

If there is a time delay between two related orders being filled, and that during that time delay prices change, this is known as slippage. Slippage is a problem that options traders can face whenever they are placing multiple orders that are related to one overall position. Most of the best online brokers offer a solution to this particular problem; they provide a specific roll up order, which basically is one order that simultaneously closes the existing position and opens up the new one with the higher strike price.

Most options trading strategies involve the use of spreads consisting of multiple positions, so you may experience a time when you need to roll up more than position at a time. If you want to roll up an entire options spread, then this can involve several transactions and can be somewhat complex. Because of this, the roll up of options spreads isn't really something that beginner options traders should be considering.

Rolling Down

This technique is very much like to the rolling up technique, but effectively the opposite. Instead of moving one position to a similar one with a higher strike price, it involves moving to one with a lower strike price. You still need to exit the existing position, and then you must enter the corresponding position using contracts that have a lower strike price.

Again, it can be applied to both short and long positions, and to both calls and puts. The top online brokers will also typically offer a roll down order, which effectively combines the two required orders into one.

There are three main reasons for using this technique, which would depend on what position you currently have and what the circumstances are. These three reasons are as follows:

To prevent assignment on a short put position. It can be used to avoid assignment if you have written puts that have moved into the money and you want to avoid the obligation of having to buy them.

To take profit on puts and speculate from further downward movement. If you owned puts that had moved deep in the money, you could roll down to take the profit from those options and purchase puts with a lower strike price. This would allow you to benefit from a further fall in the underlying security without risking the profit you have already made.

To cut losses on calls and speculate on the underlying security recovering. If you owned calls that were significantly out of the money due to the price of the underlying security falling, but felt that the underlying security may rally and their price may increase again, then rolling down is useful. You can cut your losses on your out of the money calls, and then buy calls with a lower strike price that have a better chance of returning a profit if the underlying security does start to increase in price.

Rolling Forward

When options you own or have written are reaching their expiration point there are a number of things you can choose to do depending on the circumstances. If you own options that are in the money, then you may want to exercise them if you have that choice. Alternatively, you may wish to let them run until expiration and realize any profit at that point, or you can sell them to gain the intrinsic value and any remaining extrinsic value.

If you own options that are out of the money or at the money, then you could sell them to recover any remaining extrinsic value, or let them run until expiry and see if they gained any intrinsic value by that point. If you have short position on options that are in the money, then you could choose to close it to prevent any losses if they get any further in the money. Alternatively, you could choose to let the contracts run until expiry to benefit from any remaining extrinsic value and hope they get nearer the money or fall out of the money.

You have another choice for your open positions where the options involved are nearing the expiration date, and that is to roll forward. This technique is used for moving a position to a different expiry date to extend the length of time it has to run. You basically close an existing position and open a corresponding one based on the same options, just with a later expiration date. It's also known as rolling over.

As with the two previously mentioned techniques, rolling forward can be done by simultaneously exiting the existing position and entering the new one using a specific order. If your broker offers it, then it may be advantageous to execute the transactions separately.

You could either enter the new position first and then close the existing one, or exit the existing position first and enter the new one after. This is a form of legging, and would typically be done to take advantage of moving prices i.e. to close the existing position at the best possible price and open the new one at the best possible price.

There are two primary reasons for using this technique. The most common is if you entered a position expecting to profit from a short term price movement, but now you expect that price movement to be over a longer period of time than expected.

For example, you might have bought calls on an underlying security that you were forecasting to increase in price for a specific period of time. If you then believed that it would continue to increase in price for a longer time, you would extend the length of your position to a later expiration date, enabling you to continue to profit.

The second reason is if you entered a position expecting the underlying security to move in a certain direction within a certain time frame, and then realized that it was going to take longer than expected for the underlying security to move as anticipated. You would extend the length of time available to try and profit from the expected move.

The basic concept of all three rolling techniques is relatively straightforward; the difficulty comes with knowing when to use them at the right times. They are definitely techniques you should be familiar with, because there will almost certainly be occasions when using them is a good idea. It's important to be flexible when trading options, and if you ever feel that you need to adjust a position slightly, rolling could be the best way to do that.