When rolling makes good sense


Unlike most other things that expire, option positions can be rolled to different time frames or strikes to adjust a trade.

Many retail traders open positions at an expiration that fits their thesis, then move on once it is done. Institutional traders often maintain positions for longer periods by rolling them forward as expiration approaches.

Sometimes traders move positions to higher or lower strikes within the same expiration date to get a different level of exposure. This is generally viewed through the delta of the options.

The delta is part of the option-pricing model that estimates how much the price of a contract will change given a $1 move in the underlying stock. So a change from an option with a delta of 0.25 to another with a delta of 0.40 means a greater return on an upside move.

It is more common to see traders rolling positions forward in time, especially when positions have already profited. In the case of calls, for example, traders can roll positions both to a later expiration and to a higher strike, playing for more gains while taking some money off the table in the process.

The same can be done to the downside with puts. Such a roll occurred in Pandora recently when a trader sold 6,000 December 29 puts for $5.40 in volume below previous open interest and bought 6,000 December 26 puts for $3.75. The 29s were a winning trade, as P had fallen to $25.84 at the time.

So this is one of those cases where the trader was able to collect some profits and use the rest of the proceeds to roll in to a position that was still slightly in the money with a lower delta.

An interesting variation is when traders roll to a nearer strike, either in time or closer to the stock price (or both). We saw a large player do that in the SPDR Energy Fund in large size back in June when blocks of 35,000 and 45,000 July 95 puts were bought for $0.83. Corresponding blocks of the July 93 and 90 puts were sold for $0.38 and $0.18 respectively.

In this case the trader was rolling the position to puts at the higher strike for more exposure. These puts were very likely being used for protection on long shares, rather than making an outright bearish bet, as the trader tightened up the hedge in case of a pullback.

While many retail traders don't roll their positions, they should seriously consider it. Stock prices change and time goes by, and the complex dynamics of options means that your exposure changes quickly. At the same time, rolls can allow for far more flexibility than simply buying and selling stock.

It is important, of course, to make sure that the position that you end up with is one that truly suits your needs.

(A version of this article appeared in optionMONSTER's Advantage Point newsletter.)

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