Roll Forward

AAA

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.

INVESTOPEDIA EXPLAINS '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.

RELATED TERMS
  1. Options Roll Up

    The move from one option position to another that has a higher ...
  2. Option

    A financial derivative that represents a contract sold by one ...
  3. Expiration Date (Derivatives)

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

    The amount of return generated in a backwardated futures market ...
  5. Roll Down

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

    In options trading, exiting one position and entering a new one ...
Related Articles
  1. Options & Futures

    Practical And Affordable Hedging Strategies

    Learn how to find and use the most cost-effective ways to transfer risk.
  2. Options & Futures

    Rolling LEAP Options

    The rewards of using LEAP call options can be a lower cost of capital, higher leverage and no risk of margin calls.
  3. Options & Futures

    Options Basics Tutorial

    Discover the world of options, from primary concepts to how options work and why you might use them.
  4. Options & Futures

    How To Manage Bull Put Option Spreads

    Learn how to halt options losses when the market moves quickly in an unfavorable direction.
  5. Options & Futures

    Examples Of Exchange-Traded Derivatives

    We look at some of the most common exchange-traded derivatives.
  6. Options & Futures

    Advantages Of Trading Futures Over Stocks

    We look at the top eight advantages of trading futures over stocks.
  7. Options & Futures

    Trading Volatility? Don’t Trade Stocks, Trade Options

    During times of volatility, traders can benefit greatly from trading options rather than stocks. We explain why.
  8. Options & Futures

    Top Brokers Offering Tools For Covered Calls

    Here are the brokers that offer the best tools for investors and traders to write covered calls and covered puts.
  9. Economics

    Effects of OIS Discounting for Derivative Traders

    The use of OIS discounting has important implications for derivative valuations and could positively or negatively impact a trader's profit or loss.
  10. Options & Futures

    Why Trading Coffee Futures Is A Zero Sum Game

    Coffee futures trading is as close to a zero-sum game as you might find in investing. We look at the risks and rewards.

You May Also Like

Hot Definitions
  1. Interest Rate Risk

    The risk that an investment's value will change due to a change in the absolute level of interest rates, in the spread between ...
  2. Income Effect

    In the context of economic theory, the income effect is the change in an individual's or economy's income and how that change ...
  3. Price-To-Sales Ratio - PSR

    A valuation ratio that compares a company’s stock price to its revenues. The price-to-sales ratio is an indicator of the ...
  4. Hurdle Rate

    The minimum rate of return on a project or investment required by a manager or investor. In order to compensate for risk, ...
  5. Market Value

    The price an asset would fetch in the marketplace. Market value is also commonly used to refer to the market capitalization ...
  6. Preference Shares

    Company stock with dividends that are paid to shareholders before common stock dividends are paid out. In the event of a ...
Trading Center