Options Trading Rolling Strategies
Rolling is a strategy used when trading options. It refers to moving your position to a new strike point or up and down a strike point in the same month. To "roll" basically means to move. In options trading rolling is seen as moving a position from one strike to another, either in the same month (vertically) or to another month (horizontally) or a combination of both.
Rolling is a strategy done via time or credit spreads. The art of trading spreads is a unique profitable trading strategy and is a topic for future university courses. The aim of this write up is to explain the term "roll"
To maximize returns, an investor would seek to use the covered call strategy month in and month out over an extended period of time. To do this effectively the investor has to re-initiate the strike position monthly at the option’s expiration. This monthly necessary financial procedure is where the term rolling comes from. Do note that at times the investor might chose not to roll in order to give a little more room for capital appreciate. These cases are rare and the roll option is not used because the share could be called away if the call option is exercised when it becomes in-the-money. With the approach of an option’s expiration, your short option could an either of two possibilities, in-the-money or out-of-the-money. Let us assume that we want to hold onto our stock while we consider the two possibilities.
At the case where the option finishes out-of-the money, you just let it expire worthless and then sell the next month’s call. If the outcome is opposite and the option is going to expire in-the-money and you want to keep the stock all you need to do is to buy the short option back and sell the next month’s call. The trade consists of two option trades, as you would be buying one option and selling another. This is known as the spread and is a single trade.
To roll out your covered call or buy-write, you need to do it using a spread. The option that happens to be short would be bought back thus making you still keep your stock.
The option for the second month would be sold short and this way you re-initiate your covered call strategy. The positions that remain is the long stock and short calls. There would be no choice as to the front month option; you have to buy back the option that you are short. The next month option would offer you the choice to sell either near term or with a farther out expiration date.
Tags: covered call strategy, front month option, in-the-money, options trading rolling strategy, out-of –the-money
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