Hey Traders,
Knowing how to manage your trades is easier said than done.
Sometimes … a position just gets away from you.
Or maybe you were right about the direction of your trade … it just needs a little more time.
Or you were too ambitious (or not ambitious enough) when you chose your strike.
There’s any number of situations where maybe you don’t want to close out a trade entirely, you just want to … tweak it a little.
That’s where rolling comes in.
Here’s what rolling an option entails, and a few Big Money examples.
And … We’re Rolling!
“Rolling” an option entails closing out a current position, and re-opening a similar position on the same stock. You want to do this simultaneously to make sure both legs are getting executed.
You can close and roll a straight call or put buy, but you can also close and roll sold options and spreads as well.
Generally, close and rolls mean you are maintaining your same sentiment (bullish, bearish, hedging) but tweaking the specifics like option term or strike.
Why would you want to roll an option?
There’s plenty of reasons.
First, rolling an option is a great way to lock in profits on a position while still positioning yourself to take advantage of any more upside (or downside) to come.
Say you purchased November-dated 30-strike calls on XYZ for $0.50. In the weeks since you opened your position, XYZ has rallied, and those calls are now worth $5 each!
You want to take some profits … but you still think XYZ has further to run.
In this scenario, you could close out your 30-strike calls, and re-open your position for a lower price by opening 50-strike calls for $0.75.
This means you’re collecting $4.25 by closing, but you’re still positioned to take advantage of a further XYZ rally.
Or, alternatively, maybe you still believe your initial sentiment about a stock is correct … but you want to adjust the strike or date of your current position.
Let’s say you still really like stock XYZ … but maybe you’re realizing it doesn’t quite have the steam to hit your $50 mark by November expiration.
You could roll your position by closing out your November calls, and purchasing the December calls.
This gives your trade more time to come to fruition.
Or, say you purchased puts on XYZ as a hedge for shares you own.
As the puts near expiration, you may want to take whatever premium is left, and use it to purchase options dated further out to maintain your hedge.
There’s plenty more examples, and plenty of ways to roll — these are just a few scenarios to illustrate why you might not want to close out a position entirely.
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- “Rolling out” or “rolling forward” an option refers to closing a near-term position and re-opening in a later-dated term.
- “Rolling back” indicates closing a further-dated option and re-opening at a nearer-dated term.
- When you “roll up” an option, you’re moving from a lower strike to a higher strike.
- Likewise, “rolling down” involves closing your position on higher strike, and re-opening at a lower strike.
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So what does this look like in action?
Let’s take a look.
On Wednesday, we took a look at a few Smart Money moves on Pagseguro Digital (Ticker: PAGS), including a roll out on October 37.5-strike calls to a new November 37.5-strike call, which they actually turned into a call spread.
They were able to collect $0.75 on the October 37.5-strike calls, and use that to purchase 2,000 November 37.5-strike calls for $2.65.
In this case, they also sold the November 45-strike calls to help further reduce the cost of the November 37.5’s, and they opened a January-dated spread on top of it all …
But the initial catalyst was a roll!
Or, on Friday, I also noted a big roll up on January 2022 Ford (Ticker: F) calls.
This trader closed 8,000 contracts of the January 2022 14-strike calls for $2.38, and used part of the proceeds to purchase the same number of the January 2022 16-strike calls for $1.14.
This let the trader pocket $992,000 profit, and bet on further upside in F shares — they’re essentially playing with “house money” now.
And the day before, another trader executed a huge close and roll on F as well…
This trader closed 35,000 contracts of the November 14-strike calls for $1.75, or a total of $6,125,000.
Then they immediately purchased 35,000 contracts of the December 16-strike calls for $0.76, or $2,660,000 total.
This close and roll up and out means they’re pocking nearly $3.5 million, and leaving room to take advantage of more F upside over the next two months.
When you know how to use it, closing and rolling is a powerful tool that lets you stay nimble and flexible with your trading while also tweaking your trade specifics to match your new insight.
Your Only Option,
Mark Sebastian