If you don’t want to exit, you can roll into another options series.

If you’ve been successfully earning income by writing covered calls and would like to extend that strategy over time, or if your options strategy hasn’t worked out as you planned but you think your initial forecast still holds true, you might consider rolling your options.

Rolling means first closing out an existing position, either by buying back the option you sold, or selling the option you bought. Next, you open a new position identical to the old option but with a new strike price, new expiration date, or both. If you are long an option, and you roll with enough time remaining before expiration, your old option will have some time premium left, which means it’s likely that you can earn back some of what you paid.

But on the opposite side, if you write a covered call, rolling might reduce your profit from the initial transaction. But you might roll anyway, if you don’t want your stock called away from you.

When to roll options position?

Deciding when to roll an options position depends on several factors, including the costs involved, and your market prediction.

  • As a covered call writer, you might roll down or out to extend your successful strategy and maintain the income provided by the premiums you receive.
  • If you use long puts to hedge your investment, rolling your options to ones with later expirations may extend the protection you seek.
  • You might also consider rolling if a strategy you chose hasn’t been successful, but you think that your prediction for a stock’s movement is applicable for the coming months.

What is rolling up?

If the new position you open has the same expiration date but a higher strike price, you’re rolling up. You might roll up if you’ve written a covered call on a stock that has increased in price, and you’d like to maintain your short options position — or continue to generate income — without having your stock called away from you. Rolling up also appeals to call holders who have a more bullish market forecast on the underlying stock.

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For example, say you think that XYZ, a stock that’s trading at $16, will increase in price in the next few months.

You buy a call with a strike price of $15, for a premium of $200. As expiration nears, XYZ has risen and is trading at $19. Your call is now worth $550. But you think XYZ will continue to rise, so you decide to roll your call up.

    $550 Received from sale of long call
– $200 Purchase of call

——————
= $350 Profit

You purchase a new 20 call with a later expiration, paying $300. You earned $350 by closing out the older call, a profit that offsets the cost of the new call, leaving you with a net credit of $50 on the transaction.

    $350 Profit from existing call
– $300 Purchase of new call

——————
= $50 Net profit of rolling up

options_roll_up

How does rolling down work?

If the new position you open has the same expiration but a lower strike price, you’re rolling down. This strategy might appeal to investors who’d like to receive income from writing calls on a stock for which they have a long-term neutral prediction.

For example, say you write a covered call on stock XYZ.

You predict it will be neutral or fall slightly below its current trading price of $74, so you write an 80 call, and receive $250 in premium. As expiration nears, the stock price has fallen to $72, and your short call is still out-of-the-money. That means it will likely expire unexercised, leaving you a $250 profit. But you think the stock will remain neutral or fall in the next few months, and would like to repeat your profitable trade. You buy back the option you sold for $50, locking in a profit of $200. You then sell a 75 call and receive $150 in premium.

  $250 Received from long call
– $50 Purchase of call

———————
= $200 Profit
+ $150 Received from new long call

———————

= $350 Total cash plus profitfrom rolling down

When rolling down a covered call, it’s important to keep an eye on the price you paid when you initially bought the stock. If the market price falls near your original cost, it may make sense to consider closing out your position and selling the stock. But, if the price has fallen below your initial cost but begins to rise, you might have to scramble and buy back your call.

options rolling down

What is the rolling option out?

If the new position you open has the same strike but a later expiration date, you’re rolling out. If your options strategy hasn’t yet been successful but you think you need more time for it to work, or if it has been successful and you think it will continue to be in the future, you might roll out. For example, say you purchased 100 shares of XYZ stock for $44 a share.

At the same time, you purchased a protective 40 XYZ put to prevent losses of more than $4 a share.

You paid $100 for the protection. As expiration nears, XYZ is trading at $45, but you still think there’s a chance it will fall below $40 in the coming months. You sell your out-of-the-money put for $50, earning back some of what you paid for it. You purchase a new 40 XYZ put with a later expiration for $100, and extend your downside protection at a net cost of $150.

– $100 Purchase put
+ $50 Received from put

—————
= – $50
– $100 Purchase of new put

—————
= – $150 Total cost

In conclusion

While rolling may be used effectively to increase your profits, it’s important to make sure that you base a decision to roll on your research and market forecast. If you chose a strategy and the stock moved against you, it’s possible that rolling out—or up or down—could make that strategy profitable.

But if you roll out of frustration with an unsuccessful strategy, you’re just committing more capital to a misguided trade. If you’re not confident about what will come next, it might be better just to cut your losses and exit the strategy.

Rolling Options Up, Over, and Out by Inna Rosputnia

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