Roll Forward


DEFINITION of 'Roll Forward'

To extend the expiration or maturity of an option or futures contract by closing the initial shorter-term contract and opening a new longer-term contract for the same underlying asset. A roll forward enables the trader to maintain the investment position beyond the initial expiration of the contract (since options and futures contracts have finite expiration dates) and is usually carried out shortly before expiration of the initial contract. Both legs of the roll forward are typically executed simultaneously, in order to reduce slippage (i.e. profit erosion) due to a change in the price of the underlying asset.

BREAKING DOWN 'Roll Forward'

A roll forward can be executed at the same strike price for both contracts, the initial shorter-term contract and the new longer-term one. However, if the new contract has a higher strike price than the initial contract, the strategy is called a "roll up"; if the new contract has a lower strike price, it is called a "roll down."

These strategies may be undertaken to protect profits or hedge against losses. For example, consider a trader who has a call option expiring in June with a $10 strike price on Widget Co. stock trading at $12. As the call option nears expiration, if the trader remains bullish on Widget Co., she can choose to maintain her investment stance and protect profits by (a) selling the June call option, and (b) simultaneously buying a call option expiring in September with a strike price of $12. This "roll up" to a higher strike price will reduce the cost of the position, thereby protecting part of the profits from the initial strategy.

  1. Option

    A financial derivative that represents a contract sold by one ...
  2. Options Roll Up

    The move from one option position to another that has a higher ...
  3. Expiration Date (Derivatives)

    The last day that an options or futures contract is valid. When ...
  4. Roll Down

    The replacement of an option with a new option that has a lower ...
  5. Roll Back

    In options trading, exiting one position and entering a new one ...
  6. Roll Yield

    The amount of return generated in a backwardated futures market ...
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