Rolling Options: How & When to Roll Options

Introduction

In the thrilling industry of trading and investments, the concept of “rolling options” emerges as an enticing and potentially rewarding strategy. This technique presents an abundance of opportunities for traders who seek to capitalize on various market conditions. In this article, we will dive deep into the essentials of rolling options, examine different rolling strategies, and discuss the reasons of employing this strategy in your trading routine

What Are Options?

Before digging into the concept of rolling option contracts, it's crucial to comprehend what options are. Options are a type of derivatives. Essentially, they are financial contracts that grant the buyer the right (but not the obligation) to buy or sell an underlying asset, like Bitcoin, at a predetermined price, known as the strike price, within a specified period.

On the other hand, the option seller is obliged to fulfill the option contract’s terms. If the buyer decides to exercise the option, the seller would have to either purchase or sell the underlying currency.

There are two main types of options: call options and put options. Call options give the buyer the right to buy the base asset, while put options grant the right to sell it. It is also worth mentioning that by buying a call/put option, the trader opens a long position. The opposite of the long position is a short position, which essentially is a sale of an option.

What Is Rolling an Option?

So, what does it mean “to roll an option”? Rolling an option refers to the process of closing an existing option position and simultaneously entering a new one. The new position has the same underlying crypto but a different strike price and/or expiration date.

This strategic move allows market participants to adjust their options positions in response to changing market situations, thereby enhancing their chances of profiting or minimizing potential losses.

Reasons for Rolling Options

You may wonder, what is the reason to roll position in options? Traders may choose to roll options for various causes, including locking in profits, extending the time to expiration, adjusting exercise prices, or managing risk. In essence, rolling out options serves as a vital tool for investors to adapt their strategies to the ever-evolving market dynamics.

Rolling Options Strategies

Now that we have explained the concept of rolling options, we will see what happens when you roll an option. The results will depend on the chosen strategy. In this section, we will discuss various rolling options strategies that investors can use to manage their positions.

How to Roll Options

Rolling options can be done in several ways, depending on the desired outcome. The three main types of rolls are rolling up, rolling down, and rolling out. Additionally, there are combinations of these rolls, such as rolling up and out, and rolling down and out.

Rolling Up

Rolling up refers to the process of closing a current derivative position and opening a new one with a higher strike price. This strategy is typically employed when the base asset's price is rising, and the trader aims to capture additional profits or reduce potential losses.

Rolling Down

Conversely, rolling down involves closing an existing derivative position and initiating a new one with a lower exercise price. This technique is often used when the underlying asset's price is declining, allowing the investor to capture profits or mitigate losses.

Rolling Out

Rolling out entails closing an existing derivative position and entering a new one with the same exercise price but a later expiry date. This strategy enables traders to extend the time until expiration, providing additional opportunities for the underlying cryptocurrency's price to move in their favor.

Rolling Up and Out

Rolling up and out is a combination of both rolling up and rolling out strategies. This technique involves closing an existing derivatives position and initiating a new one with a higher exercise price and a later maturity date. This strategy can be particularly useful when the trader expects the base asset's price to continue rising and wants to capitalize on that potential price movement.

Rolling Down and Out

Rolling down-and-out combines the rolling down and rolling out strategies. This entails closing an existing derivatives position and opening a new one with a lower exercise price and a later expiration date. Traders may employ this strategy when they anticipate a declining underlying asset price and wish to capture profits or minimize losses while extending the time to expiration.

How to Roll a Bull Put Credit Spread

Rolling a bull put credit spread requires closing the existing short put position and initiating a new short put position with a later expiration date and potentially a different strike price.

Additionally, the investor will need to close the existing long put position and open a new long put position with the same adjustments as the short put.

How to Roll a Call Option

Rolling a call option includes closing the existing call option and simultaneously opening a new call option with a different exercise price, expiry date, or both.

This can be done either by rolling up, down, or out, depending on the desired outcome and market conditions.

How to Roll a Put Option

Rolling a put option is similar to adjusting a call option. The investor must close the existing put option and simultaneously create a new put option with a different strike price, expiration date, or both. The trader can choose to roll up, down, or out, based on their expectations of market movements and the desired outcome.

How to Roll an Iron Condor

Rolling an iron condor involves adjusting both the call and put sides of the position. The market participant will need to close the existing short call and short put positions and open new short call and short put positions with different strike prices and/or maturity dates.

Simultaneously, the trader must close the existing long call and long put positions and create a new long call and long put positions, mirroring the adjustments made to the short positions.

Rolling Vertical Spreads

A vertical spread is an options strategy consisting of either two call options or two put options at different strike prices but with the same expiry date. To roll a vertical spread, the market participant must close both the long and short options in the existing spread and open new long and short options with different exercise prices and/or expiration dates. Rolling vertical spreads can be useful for adjusting a trader's position based on changing market climate or expectations.

Why Do Traders Roll Options?

In this section, we'll look at the reasons why market participants use rolling. Common reasons include rolling call options forward to extend time to maturity, locking in profits, or exiting/changing the existing strategy. By learning the different motivations and strategies behind this action, you will be able to make more informed trading decisions and achieve your investment goals.

Rolling Options to Lock in Profits

One of the primary reasons traders roll options is to lock in profits from their current positions. By adjusting the exercise price or expiration date, they can capture gains while maintaining exposure to the underlying crypto, potentially benefiting from further price movements.

Rolling Options Forward to Extend Time

Another common motive for rolling options is to extend the time to expiration. Traders roll options forward as it allows more time for their options positions to become profitable, particularly if they believe the underlying asset's price will eventually move in their favor.

Rolling Long Calls

Traders may roll long call options to adjust their strike prices or maturity dates, depending on market situation. This strategy can help them capture profits, minimize losses, or extend the time to expiration to benefit from potential price movements.

Rolling Long Puts

Similarly, rolling long puts allows investors to adjust their positions in response to market changes. By rolling down, up, or out, they can lock in profits, reduce potential losses, or extend the time to expiration for their derivatives positions.

Rolling Covered Calls

Rolling covered calls involves closing an existing short call position and simultaneously opening a new short call position with a different strike price and/or expiration date. This strategy is used to manage risk, generate income, or adjust positions based on market conditions and expectations.

Rolling Diagonal Spreads

A diagonal spread is an options' strategy that involves buying and selling options with different strike prices and expiration dates. To roll a diagonal spread, the trader must close the existing short option position and open a new short option position with a different exercise price and/or expiry date. Additionally, the market participant may need to adjust the long option position if necessary. Rolling diagonal spreads can be useful for managing risk, capturing profits, or extending the time to expiration based on market situation and expectations.

Rolling Ratio Spreads

A ratio spread is an options' strategy that involves buying and selling an unequal number of options with the same underlying cryptocurrency but different strike prices and/or expiration dates. To roll a ratio spread, the investor must close the existing derivatives positions and open new options positions with different exercise prices and/or maturity dates, maintaining the same ratio of long to short options. Rolling ratio spreads can be beneficial for managing risk, locking in profits, or adjusting a trader's position based on changing market conditions or expectations.

Rolling Straddles and Strangles

Straddles and strangles are options strategies that involve simultaneously buying or selling call and put options with the same or different strike prices but with the same maturity date. To roll a straddle or strangle, the market participants must close the existing call and put options positions and open new call and put options positions with different exercise prices and/or expiration dates. Rolling straddles and strangles can help traders manage risk, capitalize on profits, or extend the time to expiration based on market situation and expectations.

Managing Risk with Rolling Options

Now let's look at how risk is managed, and potential losses are minimized with rolling.

The Importance of Risk Management

Risk management is a crucial aspect of trading, and rolling options can serve as an essential tool in a trader's risk management arsenal. By adjusting options positions based on changing market climate, investors can minimize potential losses, lock in profits, and maintain exposure to the base asset.

Position Sizing and Portfolio Management

When adjusting options, it's essential to consider position sizing and overall portfolio management. By ensuring that derivatives positions are appropriately sized relative to a trader's overall portfolio, they can effectively manage risk and maintain a diversified investment approach.

Monitoring and Adjusting Positions

Regularly monitoring derivatives positions and making adjustments through rolling can be critical to successful trading. By staying vigilant and adapting to market movements, traders can optimize their options strategies and maximize their chances of profiting.

Conclusion

Rolling options is a versatile and powerful trading strategy that allows investors to adapt their options positions to changing market conditions. By understanding and mastering the different adjusting techniques, traders can lock in profits, minimize losses, and extend the time to expiration, effectively managing their derivatives positions. As with any trading strategy, it's essential to assess the risks involved and carefully consider your goals and risk tolerance before implementing adjusting options strategies. With diligent practice and a keen understanding of market dynamics, rolling options can prove to be an invaluable tool in an investor's repertoire.

*This communication is intended as strictly informational, and nothing herein constitutes an offer or a recommendation to buy, sell, or retain any specific product, security or investment, or to utilise or refrain from utilising any particular service. The use of the products and services referred to herein may be subject to certain limitations in specific jurisdictions. This communication does not constitute and shall under no circumstances be deemed to constitute investment advice. This communication is not intended to constitute a public offering of securities within the meaning of any applicable legislation.