What is what does it mean to roll an option?

Rolling an option involves extending the position by closing the existing option contract and simultaneously opening a new one with a later expiration date, a different strike price, or both. It's a strategy used to postpone the outcome of the original option, manage risk, and potentially generate more profit. Here's a breakdown:

• Why Roll? Several reasons motivate option rolling:

  • To Avoid Assignment: If an option is near expiration and in the money, the option holder may be assigned (forced to buy or sell the underlying asset). Rolling postpones this.
  • To Adjust Strike Price: If the underlying asset has moved significantly, you might roll to a strike price that is more advantageous given the current market.
  • To Extend Time: Gives the underlying asset more time to move in your favor.
  • To Collect More Premium: Rolling to a later date or a less favorable strike price can sometimes generate additional premium income.
  • Managing Losing Positions: If an option is moving against you, rolling may give the underlying asset more time to recover and potentially turn a loss into a profit or a smaller loss.

• How Rolling Works:

  1. Close the Existing Option: You buy back the option you initially sold (if you're short an option) or sell the option you initially bought (if you're long an option).
  2. Open a New Option: Simultaneously, you sell (or buy) a new option contract with a later expiration date, a different strike price, or both.

• Types of Rolls:

  • Rolling Out: Moving the expiration date further into the future, keeping the same strike price.
  • Rolling Up: Moving to a higher strike price (for calls).
  • Rolling Down: Moving to a lower strike price (for puts).
  • Rolling Out and Up/Down: Combining extending the expiration date with adjusting the strike price.

• Costs and Credits: Rolling an option can result in a net cost (debit) or a net credit, depending on the premiums of the old and new contracts. The cost or credit impacts the break-even point of the overall strategy.

• Risk Management: While rolling can be helpful, it's important to remember that it doesn't guarantee profitability. It can also increase the overall risk exposure if not managed carefully. Consider the potential costs and benefits before rolling an option.

Here are some important subjects that have links:

• Option
• Strike%20Price
• Expiration%20Date
• Premium
• Risk
• Assignment