What Does “Rolling” Mean?
A roll combines two steps:
- Closing the current option: for example, selling to close an existing position or buying to close a short position.
- Opening a new option at the same time: initiating a different position on the same underlying asset with a new expiry, possibly a new strike, or both.
Although these are two trades, they are treated as one adjustment to the position. The change may increase, decrease, or alter risk depending on the strikes and expiries chosen.
Why Traders Roll Positions
Rolling is generally used for three reasons (this description is for information only and is not a recommendation to use the strategy).
Extending the duration of the trade: Options lose value as expiry approaches due to time decay. If a trader still holds a view that they want to express using an options position, but the option is nearing expiry, rolling to a later date gives more time for the trade to play out. However, extending time also increases exposure to further time decay, volatility changes, and market movements.
Adjusting strike prices: Market prices change. A strike that made sense originally may no longer match the trader’s intended risk. For example, if an investor bought a call option and the option is now in-the-money, they may wish to profitably exit this position and initiate a new trade at the same time. This might allow them to take some profit, but the new strike may carry different risks, probabilities, and costs.
Managing risk or assignment: For traders who sell options, nearing expiry can increase the chance of assignment. Rolling out to a later expiry or away from a strike close to the underlying price may help reduce the risk of assignment. This adjustment does not eliminate risk, and short options can still be assigned early.
How a Roll Works in Practice
Example: This example is illustrative and does not reflect actual market prices.
An investor bought a £100 call on Stock ABC expiring this Friday. The stock price is £98, and they still think it could rise in price but want to give more time for the trade to play out.
They could:
● Sell their existing position in the £100 strike call expiring on Friday for the current bid of $0.15.
● Buy to open a new position in a £100 strike call expiring in one month, for $0.90.
Here the net cost of rolling the position was $0.75 per share, and the trader is able to maintain their exposure for another month, without risking their existing position expiring worthless. This does not guarantee any profit or exposure benefit. The net cost of the roll depends on the value of each option.
Rolling for Credit vs Rolling for Debit
Roll for credit: You receive more premium than it costs to close the old option. This typically involves shifting the strike further out-of-the-money. While this may reduce initial cost, it does not guarantee a favourable result.
Roll for debit: You pay more for the new option than you receive from closing the old one. This is often used when extending expiry or choosing a strike with more intrinsic value. Paying a debit increases the total amount at risk and does not assure better outcomes.
Risks and Limitations
Rolling changes your exposure but does not remove risk. Key considerations include:
● Higher overall cost: Rolling for debit increases the amount at risk. Rolling for credit may reduce cost but can make the strike harder to reach.
● Time decay continues: Extending expiry gives more time but options still lose value daily.
● Volatility effects: Implied volatility (IV) heavily influences both legs of the roll. A drop in IV can reduce the value of the new option even if you gain more time.
● Assignment risk remains: Rolling a short option may reduce assignment risk but cannot eliminate it. Execution factors such as liquidity, bid–ask spreads, and commissions can influence the result of a roll.
When Rolling May Be Inappropriate
Rolling may not be suitable when:
● Your original trade thesis has changed
● The roll significantly increases risk
● Liquidity is poor (the additional cost of the roll outweighs the potential benefit)
If uncertainty has grown or conviction has faded, closing the position entirely may be more appropriate than continuing to roll the position.
Remember: options trading carries significant risks. Always conduct thorough research, understand the risks involved, and never trade more than you can afford to lose.
Capital at risk. Options are a complex financial product and not suitable for everyone. Other fees may apply. This information is not investment advice and does not consider your personal circumstances.