Have you ever wished that you had more time to ride out a profitable trade? Or have you needed to change the strike price to adjust to changing market conditions and still maintain exposure in the same direction?
We’d like to introduce you to the concept of rolling options to make adjustments to your positions without missing out on momentum and still maintaining your exposure level. Rolling options come with the advantages of adjusting strike prices or expiration dates (or both) when they buy and sell a position at the same time.
Right up front, we’d like to allude to some of the best benefits of rolling options:
- Extend your trade, which allows time for the strategy to work
- Avoid assignments on covered calls or cash-secured puts
- Adjust risk dynamically based on market conditions
- Increase profits by collecting additional premiums
This guide will cover the most important elements of the rolling strategy, like the four common rolling techniques, some key considerations for investors before using the strategy, and the best times to use the rolling strategy. Keep reading to learn how this strategy can work for your trading strategy and goals!
What Are Rolling Strategies in Options Trading?
Rolling strategies are trading techniques where you close an existing options position and open a new one at the same time. Most of the time, these two positions have different expiration dates and strike prices. This allows investors or traders to adjust their market exposure without fully exiting a trade.
A significant advantage of using this rolling strategy is that investors can recalibrate their position in the market, which can help them lock in gains, extend the timeframe of a trade, or defer potential losses. It’s a great way for investors to successfully navigate market conditions based on the trader’s outlook and the current market movements.
Using the rolling strategies can help inventors avoid assignment, extend a trade, or adjust risk to their liking. This can lead to them limiting their potential losses to maintain exposure to profitable positions and give the underlying security the time to move further in the desired direction.
When to Consider Rolling an Options Position
When is it appropriate to use the rolling strategy to adjust options positions? There are several great reasons to close old positions and open new ones at the same time, which we’ll cover in detail here—buy yourself more time to profit in the end or mitigate potential losses like a pro.
- Approaching Expiration: If you have a profitable position, you can use a rolling strategy to establish a higher strike price while also extending the expiration date. This move buys the investors more time and gives them additional opportunities to ride the uptrend.
- Managing Risk: Using a rolling strategy can lead to locking in profits on winning trades or extending the expiration of losing trades to give them time to reach a more profitable price. In the long run, this helps a trader greatly in managing the risks that come with options trading.
- Adjusting for Changes in Market Conditions: If market conditions have moved in a direction that you weren’t anticipating, the rolling strategy can give you the time extension needed to regroup and come up with a solution for dealing with the new conditions.
- Extending the Duration of a Trade: To allow more time for a favorable move, the rolling move can extend the potential for future gains, allowing the time for the position to get in-the-money or at-the-money.
Common Rolling Strategies and How They Work
Rolling strategies come in about four varieties, and it’s key to know the difference between each and their unique role in trading online options. Each strategy works toward a particular adjustment with your position, be it the expiration date or the strike price.
Rolling Forward (Extending Expiration)
“Rolling out” refers to closing an existing position while buying a new one with the same underlying asset at the same time, but the new position has a later expiration date. You don’t completely exit the trade, and the timeframe gets extended, allowing you to adjust strategies based on market condition changes. Rolling out still lets traders maintain exposure to the underlying asset and pivot where needed without completely exiting the trade.
Rolling Covered Calls or Cash Secured Puts
A good example of “rolling out” in trading can be found when traders roll covered calls or cash-secured puts to a later expiration. In both examples, you want to open the trade timeline out further, but you don’t want to adjust the strike price of your call or put option.
– To roll out a covered call, you would buy-to-close the existing call and sell a new call with the same strike price but a later expiration date.
– To roll out a cash-secured put, a trader would close out their existing short put option and open a new short put option at the same time, but the new position would have a later expiration date.
Rolling Backward (Shortening Expiration)
“Rolling backward” is the opposite of the previous strategy. This is where investors sell an existing option and buy a new one with an earlier expiration date with the intent of locking in profits at a later time.
Rolling Up (Adjusting Strike Price Higher)
“Rolling up” refers to buying to close an existing covered call and selling another covered call on the same stock with the same expiration date. The “rolling up” portion is that the new position comes with a higher strike price.
Rolling Covered Calls or Cash Secured Puts
With rolling up a covered call, you’re looking at a situation where you’re selling a new call option with a higher strike price than your existing covered call. Rolling the position up lets you capture more upside potential on the stock, but you’re still earning premium income. There’s a tradeoff to this, however: traders have the chance of getting a lower premium due to the higher strike price being further away from the current stock price.
Rolling Down (Adjusting Strike Price Lower)
The opposite of “rolling up,” “rolling down” in options trading refers to closing the initial contract and opening a new one at a lower strike price but for the same underlying asset. The primary advantage of using this trading strategy is holding the position at a lower strike price. These are single trades with a single commission charge.
Rolling a Put Option Down
The main reason for doing this would be to reduce losses or secure better positioning. It’s done by selling a put option with a higher strike price and (at the same time) buying a new put option with a lower strike price. This lowers the potential assignment price while still holding a bearish position on the underlying stock. You can successfully limit losses or you can gain time for the market to move in the right direction.
Pros and Cons of Rolling Options Positions
Check out the top advantages and disadvantages of using the rolling strategy when trading options online. We’ve outlined the top pros and cons for your convenience. Rolling options might not always be the best option in every situation, but there are plenty of opportunities where it’s advantageous.
Pros
- Extends a trade to allow more time for the strategy to work.
- Helps avoid assignments on covered calls or cash-secured puts.
- Adjusts risk dynamically based on market conditions.
- Can potentially increase profits by collecting additional premiums.
Cons
- Rolling can increase risk exposure if not managed properly.
- Additional commissions and fees.
- Potential to turn a manageable loss into a larger problem.
Key Considerations Before Rolling a Position
Keep these things in mind when rolling positions in options trading. The more you know about the correct timing and conditions needed to successfully roll positions, the better prepared you’ll be for making the right moves at the right times.
- Market Conditions and Volatility: It’s key to conduct quality market analysis to assess the current market trend. You have to check the current market conditions and volatility levels to test if your assumption about the underlying asset is valid. Rolling might only be a good option for you if there’s a giant shift in the market that necessitates such an action.
- The Cost-Benefit of Rolling vs. Taking a Loss: Is it worth it to roll the expiration date or the strike price on your current position? Or is it easier to take the loss while you can? For instance, if your original opinion of the underlying asset has greatly changed, the cost of rolling would be way too high compared to anything you could gain from doing so.
- Does a Better Alternative Exist?: There are some instances where closing the trade entirely might be the better alternative to rolling. If you’re buying to close a call, and then wait to purchase another call at the same strike price, you would be paying more or less, depending on the price movement.
Alternative Adjustments to Consider
Rolling options may not be the best choice in every scenario, and there are a few other adjustments that traders might want to consider instead. It all depends on the situation at hand, so it’s good to be knowledgeable of the different strategies you can employ to make the best move possible.
- Closing the Position Entirely: Closing out the position involves knowing where the market will move to, so you can purchase another call at a price where you aren’t losing money. It’s a good move if the assumptions that you had about the position have fundamentally changed, but it’s best to do so only if you have a plan to pick up another call at a good price.
- Hedging with Another Strategy: It’s key to know other hedging strategies beyond rolling options because rolling isn’t always the best option for every scenario. If the underlying security is moving quickly in a direction that’s unfavorable to your position. Other situations are when the option is very deep in the money or if time decay is significantly impacting your options and their value.
- Letting the Trade Play Out: If risk tolerance allows, it might be a good idea to simply let the trade play out instead of rolling. There’s something to be said for letting the defined risk spreads open and let the probabilities play out. Rolling a trader can be subjective, so there are times when it’s better to let the trade “do its thing.”
Make Adjustments to Your Positions with Options Rolling
Whether you’re looking to buy more time for profitable positions through extending your expiration date or you want to roll the position up to capture more upside potential on the stock, options rolling is a great strategy for maneuvering the options market in a way where you can make adjustments to your position but still maintain the same level of exposure.
Rolling is a powerful tool, but should be used strategically—rolling forward allows investors to extend the expiration date, rolling backward lets them get to the expiration date quicker, rolling up lets you adjust your strike price up, and rolling down lets you adjust your strike price down.
However, it’s important to remember that rolling might not always be the best course of action in each situation. Assess your risk management approach before rolling options positions. You might want to avoid rolling if there are market volatility spikes, deep-in-the-money options, or there’s an unclear market direction.
