Rolling: The Art and Science of Extending a Trade's Duration

Explore rolling options “losers” to extend duration for covered calls, naked calls or puts, one side of a short strangle, and select other trades.

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Expiration is approaching and you have an options position—let’s say a covered call or a long-dated calendar spread. So, you have a decision to make. Should you close the trade or roll it? Here’s a simple way to test your criteria that could help you decide. 

First, check to see if any of your original assumptions have changed. If this is a covered call, are you still bullish on the underlying? If this is a calendar spread, does the underlying still have the probability to move toward a new strike price? 

Next, you must decide if the extrinsic value—the difference between an option’s market price and the contract’s intrinsic (in the money, not time) value—of the short strike is small enough to justify rolling. Finally, will the resulting position still fit your portfolio? Remember the goal of the original trade and always keep in mind that if your assumption changes, so should your position.

Knowing When to Stick Around or Bail Out

Should you roll a winning trade? It depends. You could take your profits and move on. Or you could look at your position as a new trade and decide whether rolling into the next expiration makes sense? Taking a profit, or managing winners, is just as important as managing losers. There is no right answer, but the decision not to roll allows you to potentially “lock in” profits (minus transaction costs).

If you want to put on a similar trade, you might first check to make sure your assumptions are the same, and reestablish the position when you feel the time is right. If you achieve your profit target early, you may not want to wait for expiration to take potential profits, as the stock could reverse at any time. 

But what about a losing trade? Rolling a losing trade is a more subjective scenario, with many factors to consider. Rolling a loser is a defensive strategy that is designed to reduce the current loss by capturing more premium and giving the trade more time to potentially work in your favor. But keep in mind, rolling a short option that is deep in the money could include paying a debit to roll. Of course, it could also be prudent to just close the trade, check assumptions, and put on a new trade at new strike prices and probabilities. 

The next question: What’s the correct number of rolls that any one position might produce? Again, it depends. If your position consists of a covered-call strategy, you can potentially roll often and add (or reduce) risk through strike selection. 

Is It “Roll Worthy”?

As you can imagine, some strategies fit the profile and others don’t. Popular positions for rolling include covered calls, naked calls, or naked puts, and calendar spreads. Those believed to be unsuitable for rolling are strategies like vertical spreads and butterfly spreads. These are risk-defined strategies that would be easier to close and reestablish after evaluating assumptions.   

Roll Smart

Consider the potential pitfalls of rolling ahead of time by keeping an eye out for earnings and dividends. Historically, implied volatility increases when earnings announcements fall near their an option's expiration.  

Closely monitor a series of rolled short options that will contain a dividend, as this can bring assignment risk into your strategy. Instead, consider strategies that aim to lower assignment risk by keeping your short options at the money or out of the money and away from dividends. Remember though, short options can be assigned at any time up to expiration regardless of the in-the-money amount.

Extending the duration of an options trade using rolling strategies can help you manage portfolio risk. Once mastered, rolling could even become a vital and consistent part of your daily or monthly trading routine. (Just bear in mind that rolling strategies can entail substantial transaction costs, including multiple commissions, which may impact any potential return.)

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Spreads, straddles, and other multiple-leg option strategies can entail substantial transaction costs, including multiple commissions, which may impact any potential return. These are advanced option strategies and often involve greater risk, and more complex risk, than basic options trades.  

The risk of loss on an uncovered call option position is potentially unlimited since there is no limit to the price increase of the underlying security. The naked put strategy includes a high risk of purchasing the corresponding stock at the strike price when the market price of the stock will likely be lower. Naked option strategies involve the highest amount of risk and are only appropriate for traders with the highest risk tolerance.   

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Market volatility, volume, and system availability may delay account access and trade executions.

Past performance of a security or strategy does not guarantee future results or success.

Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options.

Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request.

The information is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.

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