Rolling Option

Rolling Option
See also

Rolling option - is applied to describing the Options deal that includes opening one position and closing a similar one for the same stock [1].

The essence of the rolling option

Typically, this process occurs close expiration in order to protect or positions of income are pushed further out in time. "At the point where an option transaction is initiated, the selection must be based on thorough comparisons between the three possible outcomes" [2]. This allows to distinguish [3]:

  • Rolling out means postponing expirations for a strategy. In case of rolling an option, a combination order comparable to any other one is placed. Due to the upcoming expiration date, you might not be able to achieve a more desirable execution for the combination. Usually, closing the primary option means paying an extra commission. The original option could likely have expired the valueless. However, at the same time, you get the additional time value for the option which has been sold.
  • Alternatively, you can roll up in price to exclude assignment risk or realize not typically high implied volatility in order to obtain a higher strike option.
  • Apart from rolling out and rolling up there is also rolling down the exercise price. This is a way to avoid risk or obtain on unusual high implied volatility to achieve a lower strike option.

It might be significant at the moment where the value of the stock market drops after an option has been recorded, but when the base is still smaller than the improved striking price [4].

Rolling option in use

Combinations of these rolling could be also mixed. It is possible to roll up and out or roll down and out. This depends on the value for the underlying, market expectations for it and also implied conditions [5]. In fact, the technique of rolling is beneficial when taking advantages of time values in arrangements with a later expiration day. The one option can be rolled up and forward indefinitely. Nevertheless, exercise can occur at any period of time, when there are all-in-money conditions[6].

Disadvantage of rolling option

The main disadvantage is the risk. The market could continue to gradually move upon to the new position, possibly make bigger losses. In a result, this movement can cause damage. This is the major reason why rolling option could be analyzed as an aggressive strategy for some merchants [7].

References

Footnotes

  1. J. Duarte 2017, p. 152
  2. M.C. Thomsett 1989, p. 141
  3. J. Duarte 2017, p. 152
  4. M.C. Thomsett 1989, p. 141
  5. J. Duarte 2017, p. 152
  6. M.C. Thomsett 1989, p. 141
  7. J. Cordier 2014, p. 194

Author: Aleksandra Zegiel