When an investor establishes an options contract through an opening transaction, there’s no requirement to keep the position until expiration or exercise. In practice, most options positions are closed through closing transactions.
Instead of simply closing a position and staying out of the market, some investors choose to roll an option position - closing the existing contract and replacing it with a new one. There are three general ways to do this:
Rolling up an option means closing the current contract and replacing it with one that has a higher strike price.
Assume an investor establishes this covered call:
Long 100 ABC shares at $54
Short 1 ABC Jan 55 call at $4
If the investor expects ABC’s stock price to rise, they may want to reduce the chance of assignment. If ABC’s market price rises above $55, the short call is likely to be assigned, which would require selling the stock at $55. Many covered call investors prefer the call to expire unexercised and the stock to avoid a large move higher; otherwise, they face opportunity cost/risk.
To roll up, the investor closes the existing short call with a closing purchase (assume the call can be bought back for $3) and then sells a new call at a higher strike price:
Short 1 ABC Jan 55 call at $4 (initial premium received)
Long 1 ABC Jan 55 call at $3 (premium paid to close)
At this point, the short call is closed. The investor received $4 when the call was sold and paid $3 to buy it back, for a net $1 credit ($100 overall gain). The remaining position is:
Long 100 ABC shares at $54
Now the investor can write a new call with a higher strike price. Assume they sell a Jan 60 call for $2:
Long 100 ABC shares at $54
Short 1 ABC Jan 60 call at $2
To summarize, the investor began with:
Long 100 ABC shares at $54
Short 1 ABC Jan 55 call at $4 (closed for a $3 premium)
And ended with:
Long 100 ABC shares at $54
Short 1 ABC Jan 60 call at $2
Therefore, rolling up means closing a contract and replacing it with a new contract containing a higher strike price.
Rolling down an option means closing the current contract and replacing it with one that has a lower strike price.
Assume the investor starts with the same covered call:
Long 100 ABC shares at $54
Short 1 ABC Jan 55 call at $4
If ABC’s stock price falls (assume to $48), the short call becomes less valuable, but the stock position loses value as the market price declines. The investor may choose to roll down to collect additional premium that can help offset stock losses. Closing the existing call and selling a lower-strike call typically brings in more premium than continuing to hold the original call.
To roll down, the investor closes the existing short call with a closing purchase (assume it can be bought back for $1) and then sells a new call at a lower strike price:
Short 1 ABC Jan 55 call at $4 (initial premium received)
Long 1 ABC Jan 55 call at $1 (premium paid to close)
At this point, the short call is closed. The investor received $4 and paid $1 to close, for a net $3 credit ($300 overall gain). The remaining position is:
Long 100 ABC shares at $54 (currently worth $48/share)
Now the investor can write a new call with a lower strike price. Assume they sell a Jan 50 call for $3:
Long 100 ABC shares at $54
Short 1 ABC Jan 50 call at $3
To summarize, the investor began with:
Long 100 ABC shares at $54
Short 1 ABC Jan 55 call at $4 (closed for a $1 premium)
And ended with:
Long 100 ABC shares at $54
Short 1 ABC Jan 50 call at $3
Therefore, rolling down means closing a contract and replacing it with a new contract containing a lower strike price.
Rolling out (forward) an option means closing the current contract and replacing it with one that has a longer expiration.
Assume the investor starts with this covered call:
Long 100 ABC shares at $54
Short 1 ABC Jan 55 call at $4
If the Jan call is close to expiration and ABC’s market price has remained relatively flat, the investor may roll out to collect additional premium. As expiration approaches, the option’s time value typically declines, which can allow the investor to buy back the short call for less. Selling a new call with a later expiration generates a new premium.
To roll out, the investor closes the existing short call with a closing purchase (assume it can be bought back for $1) and then sells a new call with a later expiration:
Short 1 ABC Jan 55 call at $4 (initial premium received)
Long 1 ABC Jan 55 call at $1 (premium paid to close)
At this point, the short call is closed. The investor received $4 and paid $1 to close, for a net $3 credit ($300 overall gain). The remaining position is:
Long 100 ABC shares at $54 (currently worth $48/share)
Now the investor can write a new call with a longer expiration. Assume they sell a Jun 55 call for $6:
Long 100 ABC shares at $54
Short 1 ABC Jun 55 call at $6
To summarize, the investor began with:
Long 100 ABC shares at $54
Short 1 ABC Jan 55 call at $4 (closed for a $1 premium)
And ended with:
Long 100 ABC shares at $54
Short 1 ABC Jun 55 call at $6
Therefore, rolling out means closing a contract and replacing it with a new contract containing a longer expiration.
Sign up for free to take 9 quiz questions on this topic