Rolling Option
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].
Examples of Rolling Option
- Rolling a long call option: When a trader holds a long call option and the option is about to expire, the trader can choose to open a new long call option with the same stock and same strike price. This way, the trader can benefit from a potentially increasing stock price without having to bear any additional cost.
- Rolling a short call option: When a trader holds a short call option and the option is about to expire, the trader can choose to open a new short call option with the same stock and same strike price. This way, the trader can benefit from a potentially decreasing stock price without having to bear any additional cost.
- Rolling a long put option: When a trader holds a long put option and the option is about to expire, the trader can choose to open a new long put option with the same stock and same strike price. This way, the trader can benefit from a potentially decreasing stock price without having to bear any additional cost.
- Rolling a short put option: When a trader holds a short put option and the option is about to expire, the trader can choose to open a new short put option with the same stock and same strike price. This way, the trader can benefit from a potentially increasing stock price without having to bear any additional cost.
Rolling option is a type of options deal, that involves opening one position and closing a similar one for the same stock. There are also several other approaches related to rolling option, including:
- Rolling up, where an investor increases the strike price of the option they are rolling. This way, they can take advantage of a higher strike price, which may provide them with more gains than the original option.
- Rolling down, which is the opposite of rolling up. Here, the investor lowers their strike price, meaning they will have to accept a lower price for their option. This can be beneficial if the market is going down, allowing them to minimize their losses.
- Rolling over, which involves taking the proceeds from one option and using them to purchase a new option. This approach can be useful for investors who are looking to maintain their existing positions, while also taking advantage of different market conditions.
In summary, rolling option is a type of options deal that involves opening one position and closing a similar one for the same stock. There are several other approaches related to rolling option, including rolling up, rolling down, and rolling over.
| Rolling Option — recommended articles |
| Gamma hedging — Short Straddle — Short Call — Short call option — Zero cost collar — Options — Selling Into Strength — Bear spread — Buying Hedge |
References
- Cordier J., Gross M. (2014) The Complete Guide to Option Selling: How Selling Options Can Lead to Stellar Returns in Bull and Bear Market, McGraw Hill Professional.
- Duarte J. (2017) Trading options for dummies, John Wiley & Sons, Hoboken.
- Thomsett M. (1989) The Mathematics of Investing: a Complete Reference, John Wiley & Sons, Canada.
Footnotes
Author: Aleksandra Zegiel
