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What Is an Options Roll Up?

Sebencapital

Published
22/12/23
What Is an Options Roll Up?

DEFINITION:

An options roll-up happens when you sell an existing options contract and buy another one with the same underlying asset and expiration date but at a higher strike price. This allows you to secure your profits while opening up a chance to potentially earn more and manage your risk effectively.

Key Takeaways

  • Options roll-up means selling one options contract to secure gains and, at the same time, purchasing a new option for the same asset and expiry date but at a higher strike price. This strategy helps to lock in profits while aiming for potential further gains in trading options.
  • Rolling up options contracts secures your profits and might reduce risk by buying additional out-of-the-money contracts. This strategy aims to safeguard gains while potentially minimizing potential downsides in options trading.
  • An options roll-down is the opposite approach to an options roll-up when managing options contracts. It's an alternative strategy used while adjusting or rolling an options contract.

Definition and Examples of an Options Roll-Up

An options roll up involves closing an existing options contract and opening a new one on the same asset. The new contract has the same expiration date but a higher strike price. This strategy helps secure profits by selling the option for a higher price than what you initially paid. It also lowers risk because you're selling it before potential price drops while still benefiting from a profitable trend.

To carry out an options roll up, you sell your current contract to make a profit and purchase another contract that's further away from the current trading price of the asset. This move decreases your overall risk because the new contract is "out of the money," indicating the asset's price is below the strike price.

Note

Lots of traders use options rollups to create earnings or modify their positions when their viewpoint about the market changes.

Let's say it's October, and you own call options for XYZ Construction Co. They have a strike price of ₹205 and expire next June. You initially bought these options when the company's stock was valued at ₹150 per share. Right now, the stock is at ₹195 per share. To secure your gains and keep benefiting from the rising trend, you sell your current call options for a profit. Then, you buy more options for XYZ Construction Co. with the same expiry date but at a higher strike price of ₹210.

How an Options Roll-Up Works

Depending on your existing options, rolling up an option can help secure profits or handle the time decay of your position. Here's how options roll ups can be used for various call and put positions:


Rolling Up Calls: If you have call options that are profitable, you can roll them up. This means selling your current call positions to secure profits and, at the same time, buying new call positions with higher strike prices. Rolling up calls is a strategy that shows optimism in the market.

Rolling Up Puts: When you own put options that haven't been profitable and you aim to cut losses, you can roll up these options. This involves selling the current options and purchasing more put options at lower prices when the stock prices are higher (that's why it's called "rolling up"). Rolling up puts is a strategy that reflects a pessimistic view of the market.

Note

Rolling up an option contract doesn't promise better returns and needs careful thought before taking action.

Alternatives to Options Roll Ups

"Rolling" covers both "rolling up" and "rolling down" an options contract.

Rolling down an option is the opposite of rolling up. To roll down, you'd sell an existing option and buy another one with the same underlying asset and expiry date, but with a lower strike price.

Another type of rolling is called a rollout or roll forward. This involves closing an existing options position while simultaneously opening a new one with the same type of contract and underlying asset.

What It Means for Individual Investors

If you buy options to enhance your investment portfolio, you might think about rolling up an options contract to boost potential profits. This move helps reduce risk by buying contracts that are further out-of-the-money.

Options trading is inherently risky, so rolling up an options contract can be helpful in managing the overall risk linked with these contracts.

Written by Sauravsingh

Techpreneur and adept trader, Sauravsingh Tomar seamlessly blends the worlds of technology and finance. With rich experience in Forex and Stock markets, he's not only a trading maven but also a pioneer in innovative digital solutions. Beyond charts and code, Sauravsingh is a passionate mentor, guiding many towards financial and technological success. In his downtime, he's often found exploring new places or immersed in a compelling read.

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