DEFINITION of 'Roll Down'

The replacement of an option with a new option that has a lower strike price. The use of a roll down means that the investor does not have to exercise the option. Instead, the investor extends the time period over until the investment expires.

BREAKING DOWN 'Roll Down'

A roll down strategy can help an investor mitigate losses when the underlying asset is declining in value. For example, an investor who has purchased a securities option to purchase 100 shares believes that the value of shares is going to decline. The investor sells a call with a higher strike price and earns a premium. The stock does decline in value and the call is now worth less. The investor cancels the call and makes a profit. Then the investor sells another call with a new strike price and receives a premium on that option as well.

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