Rolling Options: When We Do It and What to Watch Out For

What it means to roll an option

Rolling (roll) means doing two things at once: closing the short option we hold and opening a similar one with a later expiration, usually at a different strike. It's used when the price has moved against us and we don't want to be assigned (or we want to be assigned at a better price).

First: do you want to stay in the position?

Before looking at premiums, you have to answer one question: do I want to stay exposed to this stock? If the answer is no, sometimes the best move is to let ourselves be assigned (or have the shares called away) and close the book with whatever result we get. Rolling for the sake of rolling just drags out a trade we're no longer convinced about.

Our three conditions for rolling

1. For a credit: the new option should pay us more than it costs to close the old one.
2. Without going too far out in time: the more months, the more credit, but the longer we're tied up and the more things can happen.
3. Improving the strike when possible: lowering the strike of a short put or raising the strike of a short call.

When the price has moved a lot, all three aren't always possible. Then you have to choose which one matters most in that specific case.

Raising the strike on a call: every dollar is $100

With shares in your portfolio and a short call, rolling up the strike has an effect that's sometimes overlooked: every dollar we raise the strike adds $100 per contract if the shares end up being called away. That's why, if we think the stock will hold or rise, we prefer to roll up the strike even if the credit is small. If we think it's going to fall, we don't overcomplicate it: we let the shares be called away at the current strike.

The loss you don't see: realized vs. "for a credit"

This point causes a lot of confusion. A real example from our newsletters:

• We sold a put for $77.95.
• The price moved against us and we closed it for $231.70: that trade has a realized loss of $153.75.
• At the same time we sold another, longer-dated put that paid us more than that $231.70: that's why we say we rolled for a credit.

Both things are true at once. The first trade is closed and its loss is already real. The new put is a separate open trade whose result we don't know yet: the credit collected offsets the loss for now, but if the new option also goes against us, the result can get worse. That's why you shouldn't confuse "rolling for a credit" with "not having lost."

For the same reason, after a roll the profit that Interactive Brokers shows for the new option is not the real result of the position: we explain it in why the IB profit isn't the real one after rolling.

When we don't roll

• When we no longer want the stock.
• When the roll is only possible for a debit or at a very long expiration.
• On long-term option purchases (such as the call left over from a call debit spread): if the stock doesn't cooperate, we prefer to take the loss, which was already limited.

If you want to review the basic mechanics of the roll, Mario explains them in his tutorial on the roll over (in Spanish).