An options roll up takes place when you sell a current options contract and buy another one with the same underlying security and expiration date at a higher strike price. This lets you roll up options to lock in your profits while potentially creating an opportunity to make more money and limit your risk.
What is options roll up, and how does one work? Here is a detailed explanation of rolling up an option contract with examples, alternative strategies, and what they mean for you.
Definition and Examples of an Options Roll Up
An options roll up refers to closing an existing options contract and opening a new position on the same underlying security. This position has the same expiration date and a higher strike price.
You can carry out an options roll up on an option that’s already made you money to lock in your profits by selling it for more than you bought it. This also reduces your risk because you’re selling it before the price can drop while still riding the money-making trend.
You execute an options roll up by selling your current contract to make money and buy another contract that’s further out of the money (OTM)—meaning the underlying asset is trading below the strike price—thus reducing your overall risk.
Many traders use options rollups to generate income or to adjust a position because their outlook changes.
Imagine that it’s October, and you currently own call options on XYZ Construction Co. with a strike price of $205 and an expiration date of June 30 the following year. You bought the call options when XYZ Construction Co. was valued at $150. Its price per share is currently priced at $195. You want to lock in your profits and continue riding the upward trend, so you sell your current call options for a profit and buy more on XYZ Construction Co. with the same expiration date but at a higher strike price of $210.
How an Options Roll Up Works
Depending on your current options position, you might roll up an option to either lock in your profits or manage the time decay of your position. Here’s how options roll ups would work for different call and put positions:
- Rolling Up Calls: If you own call options that are in the money, you can roll them up by selling your current call positions. You take the profits while simultaneously buying new call positions with higher strike prices. Rolling up a call option is a bullish strategy.
- Rolling Up Puts: If you own put options that are out of the money and you want to lock in your losses, you can roll up those options. You sell the options and buy more put options with lower premiums when the underlying stock prices are higher (hence “rolling up”). Rolling up a put option is considered a bearish strategy.
Rolling up an option contract does not guarantee higher returns and should be approached with careful consideration.
Alternatives to Options Roll Ups
“Rolling” is the parent term that is inclusive of both “rolling up” and “rolling down” an options contract.
Rolling down the option is the opposite of an options roll up. To roll down an option, you’d sell an existing option contract. Simultaneously, you’d purchase another options contract with the same underlying security and expiration date. However, you’d set a lower strike price.
Another way to roll an option is a rollout. Also known as a roll forward, a rollout refers to any order to close an option position. At the same time, you’d open a new position with the same type of options contract and same underlying security.
What It Means for Individual Investors
If you purchase options to complement your current investment portfolio, you may consider rolling up an options contract to increase your profits. You limit your risk by purchasing further out-of-the-money contracts.
Since trading options is a risky investing strategy by nature, rolling up an options contract is beneficial by helping you manage the overall risk involved with options contracts.
- Options roll ups are the act of selling an options contract to lock in profits while simultaneously buying a new option on the same security and expiration date with a higher strike price.
- Rolling up options contracts will lock in your profits while potentially lowering your risk by purchasing further out-of-the-money contracts.
- The opposite of an options roll up is an options roll down, which is an alternative strategy when rolling an options contract.