“Rolling” refers to a way to initiate a change in an option position’s strike price, or its expiry date, or both. The usual purpose of doing this is to hold on to an option position that is reaching the date when it would normally be sold, which, under my own guidelines for trading mentioned elsewhere on this website, is about one month prior to its actual expiry date. This method of “rolling” is sometimes referred to as a continuation technique, obviously a way to continue to hold a position and allow participation in the entire range of movement that a stock may achieve.

There are at least 3 ways to roll a position depending on the objectives
There are various names applied to the rolling techniques, for instance, Roll Up and Roll Down are versions of a Vertical Roll — and a Roll Out is a Horizontal Roll. A Roll Out and Up or Roll Out and Down are versions of the Diagonal Roll.

  • Roll up, or Vertical Roll refers to changing an option strike price to a higher strike price in the same month.
  • Roll down, also a Vertical Roll, refers to changing an option strike price to a lower strike price in the same month.When implementing a Vertical Roll, the trader sells the contracts of the existing position and buys the same number of contracts for the same expiry date but at a different strike price, either higher or lower, depending on the direction that the underlying stock is moving.With a call position in a stock moving up, the trader closes the existing call and replaces it with a call at a higher strike price. With a put position in a stock that continues to move down, the existing put is sold and replaced by a put at a lower strike price.As stated, the vertical roll allows you to lock in profits and lower risk, while maintaining the same position size. By addressing the concerns of profit and risk, you’ll have a much easier and better opportunity to follow the full run of the stock without risking the profits already built up in the option.
  • Roll Out, or Horizontal Roll refers to changing to an expiration at a later date while maintaining the same strike price.
  • Roll Up and Out, or Diagonal Roll refers to a combination of the above, changing both the strike price and the expiry date. And a Roll Down and Out accomplishes the same to the downside.

An example paper trading play on this website, referring to rolling an option, can be found for reference at A Better Exit Strategy.

Related posts:

  1. The Option Greeks in the Determination of Options Pricing
  2. Buy the Stock or Buy the Option? Risks and Rewards in Trading Options
  3. Selling, When to Exit a Stock Position
  4. The Previous AGCO Paper Trade and a Better Exit Strategy
  5. Constructing a Portfolio for Tracking Trades in Real Time
  6. Stock Options Explained – Part 2
  7. Trading Options for the Beginner

Filed under: Explanation

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