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Rolling options trading strategy - when and how to use ?

Updated: Dec 12, 2020



In this post, we will describe in brief why and how to use rolling option trade strategy


What is Rolling

Rolling an option trade is an alternative available for traders if they do not want to close the trade and buy time by moving the expiration to further date to either gain more profits or to minimize their losses. For example, Let's say, you were in FB 275 calls expiring on Dec 4, 2020 and had made considerable profits on your Dec 04 275 calls when FB moved from 275 to 288. Your options had more than doubled and you wanted to protect your profits. Also, you feel that FB has a bigger move to 300 in one week and want to capitalize on that move. The best way to do is to close the Dec 4 275 calls and open Dec 11 285 or 290 calls. Why? In that way, you can protect the profits gained from Dec 04 275 calls and use some of the profits to pay the premium for the Dec 11 285 or 290 calls. Most of the trading platforms provide this option trade of closing the current option and buying an option at further expiration as a single operation called Roll.


What can be rolled?

Both short and long option trades can be rolled. Even credit spreads can be rolled. Generally, when you roll a long ( long call, long put) or short ( short call, short put) positions, there will be two trades executed on your trading platform - one for closing the current option trade and another for buying the option trade on future expiration specified. Since spreads can involve more than one option leg, there will be 2 trades for every option leg of the spread. In case of vertical spreads, there will be 4 trades. In more complex strategies like butterfly or iron condor, there will be 8 trades.


When can an option trade be rolled?

An option trade can be rolled at any time before the expiration. Ideally, you would want to roll a trade if you have a winning trade and are receiving credit for the rolled up trade ( the trade has potential for more profits). Since options are tied to time, sometimes, it makes sense to roll a losing trade to give some time to capture events of the underlying stock like earnings, press releases etc to minimize losses. Be aware that you will be usually paying more premium for losing trades and take time to evaluate if it is really worth rolling the trade.


How to roll a trade?

Most trading platforms support rolling an option trade. Lets say, you see lot of profit potential for FB and you want to roll Dec 11 FB 285 calls to Dec 18 FB 295 calls

I use E-trade and below is the screen shot for executing this trade on the platform. When you double click on an option position, a window opens up showing all the options available for the position



When you click on Roll button, an another window pops up with the current option trade and option trade with same strike price but with expiration next week. You can change the strike price and expiration in the window.





Summary

Rolling an option trade strategy is very nice to use in trending markets when you want to protect your profits and capitalize on the trending market for more gains. However, be cautious of rolling the losing option trades as you might end up paying more premium when you roll the trades and incur more losses if the underlying stock is not moving in your intended direction.


FYI, If you like this post, you would also like how to place conditional orders for option trades


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