Summary:
In the context of options trading, an option roll up refers to an existing position that is closed and a new one is opened at a higher strike price. If you are just getting started with rolling options, this blog will help you with the fundamentals and help you make better decisions to get the returns you want.
Introduction to option roll up
In the context of options trading, an option roll up refers to an existing position that is closed and a new one is opened at a higher strike price. This is the opposite of option roll down, where the current position is closed and a new one is opened at a lower strike price. This blog will introduce you to the basics and help you make better investment decisions.
How option roll up works
When the current position is closed and a new one is opened for a higher strike price, it is known as an option roll up. This is for the same underlying asset; the existing contract is struck and a new one at a higher strike price is agreed upon. So that there is no loss from profit erosion or slippage, the investor executes both contracts simultaneously.
The roll up procedure is the same, irrespective of whether it is a call or put position. In this context, it is a bullish outlook when there is a call option because the expectation is that the price will increase. It can also be a bullish perspective when there is a put option because there is the anticipation that the price will not fall.
However, there is one thing that you will need to keep in mind to ensure that the cost of entering a new position should not be more than the profits from the previous contract.
How to execute an option roll up
To execute a successful option roll up, the following steps may be considered.
- Evaluate your existing position: Before you opt for an option roll up, check if you have the appetite and the resources for it. Proper scrutiny of things such as your strike price and expiry date will determine whether you can afford to go for an option roll up.
- Decide on your goals: The stand that you take could be in line with approaches such as:
Locking in profits: This is possible when the current position that you are in will give you guaranteed returns, but you still want to bet on future gains that you can make in the future. - Reducing risk: If it is evident that movements in the price of your underlying asset are making it risky to get returns, you may use option roll up to diminish your chances of losses.
- Select the new contract and place the opening and closing trade: In this step, you decide on the contracts that will prove to be favourable for you in terms of your goals and then execute the closing and opening trades. These close your existing position and open a new one.
- Review and confirm: Before you go ahead and execute the order, check the details, and confirm that the contracts are correct.
- Order execution: This process requires swiftness in terms of execution so that there is no deviation in the price.
- Track your new position: After the process is complete, monitor the position and check whether the movement is per the expectations you had. Need be, you can opt for a further roll up to maximise returns/minimise returns.
Types of option roll up
- Call roll up: During this roll up, an existing call position is closed and a new one is opened with a later expiration date or a higher strike price.
- Put roll up: During this roll up, an existing put position is closed and a new one is opened with a later expiration date or a higher strike price.
- Vertical roll up: In this trade, a strike call option that is lower is closed and one that is higher is opened.
- Calendar roll up: A calendar roll-up involves closing an existing calendar spread position (a combination of long and short options with different expiration dates) and opening a new calendar spread with later expiration dates.
- Diagonal roll up: During a diagonal roll up, vertical and calendar methodologies are combined. It involves closing a current diagonal spread position (options that have separate strike prices and expiry dates) and opening a new diagonal spread that has higher strike prices or expiry dates that are later.
- Iron condor roll up: This is an option strategy that involves both put and call options. This involves closing the current iron condor and then opening one that has wider spreads or strike prices that are different.
Summing up
Usually, an option roll up is pursued by investors when there is a degree of certainty that the movement of the underlying asset will be in a more favourable position. However, remaining vigilant will ensure the chances of potential returns are higher and losses are minimised.