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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3 min read
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Key Takeaways

  • Understand key considerations when rolling an options position
  • Learn to weigh the potential risks and rewards when choosing between rolling or closing a trade
  • Understand the importance of timing a rolling trade to avoid potential pitfalls

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

First, traders should check to see if any of their original assumptions have changed. If this is a covered call, are they 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, decide if the extrinsic value—the difference between the market price of the option and the contract’s intrinsic (in the money, not time) value—of the short strike is small enough to justify rolling. Finally, traders should determine if the resulting position still aligns with their portfolio. Traders should also remember the goal of the original trade and always keep in mind that if their assumption changes, so should their position.

Knowing When to Stick Around or Bail Out

Should traders roll a winning trade? It depends. They could take their profits and move on. Or they could look at their 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’s no right answer, but the decision not to roll allows traders to potentially “lock in” profits or limit the losses (minus transaction costs) if the trade has gone against them.

If traders want to put on a similar trade, they might first check to make sure their assumptions are the same and reestablish the position when they feel the time is right. If they achieve their profit target early, they may not want to wait for expiration to take potential profits because 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 designed to reduce the current loss by capturing more premium and giving the trade more time to potentially work in a trader’s favor. But keep in mind, rolling a short option that is deep in the money (ITM) 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 a trader’s position consists of a covered call strategy, they can potentially roll often and add (or reduce) risk through strike selection. 

Is It “Roll Worthy”?

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

Roll Smart

Consider rolling early to avoid potential pitfalls by keeping an eye out for earnings and dividends. Historically, implied volatility increases when earnings announcements occur close to an options contract’s expiration date.  

Closely monitor any rolled short options for ex-dividend dates on the underlying stock because this is when traders may experience increased assignment risk. Instead, consider strategies that aim to lower assignment risk by keeping 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 ITM amount.

Extending the duration of an options trade using rolling strategies can help traders manage portfolio risk. Once mastered, rolling could even become a vital and consistent part of their 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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Key Takeaways

  • Understand key considerations when rolling an options position
  • Learn to weigh the potential risks and rewards when choosing between rolling or closing a trade
  • Understand the importance of timing a rolling trade to avoid potential pitfalls

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Content intended for educational/informational purposes only. Not investment advice, or a recommendation of any security, strategy, or account type.

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.

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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