Roll Forward

What does 'Roll Forward' mean

Roll forward is 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.

RELATED TERMS
  1. Options Roll Up

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

    The amount of return generated in a backwardated futures market ...
  3. Put Calendar

    An option strategy: -Buy one put option contract with 90 days ...
  4. Quadruple Witching

    The expiration date of various stock index futures, stock index ...
  5. Roll Down

    The replacement of an option with a new option that has a lower ...
  6. Serial Option

    A short-term option on a futures contract in which the underlying ...
Related Articles
  1. Investing

    Options on Futures

    Options on futures contracts offer another way for day traders to use options. These are traded on the same exchange as the underlying futures contract. Traders should take care to understand ...
  2. Investing

    Income Strategies for Your Portfolio to Make Money Regularly

    Discover the option-writing strategies that can deliver consistent income, including the use of put options instead of limit orders, and maximizing premiums.
  3. Markets

    How to Trade Options on Government Bonds

    A look at trading options on debt instruments, like U.S. Treasury bonds and other government securities.
  4. Trading

    The Difference Between Forwards and Futures

    Both forward and futures contracts allow investors to buy or sell an asset at a specific time and price.
  5. Investing

    Getting Acquainted With Options Trading

    Learn more about stock options, including some basic terminology and the source of profits.
  6. Trading

    How to Trade Volatility Using Binary Options - Sponsored by Nadex

    Binary options are similar to classic options with some slight nuances but the components used for the option’s pricing are the same; underlying market, strike (K), volatility and time.
  7. Trading

    Give Yourself More Options With Weekly and Quarterly Options

    Weekly and quarterly options were introduced to give a greater choice of option expirations to investors, and enable them to trade more efficiently.
  8. Trading

    Do Option Sellers Have a Trading Edge?

    Take a look at a study that discovered that three out of every four options expired worthless.
  9. Markets

    Investing in Crude Oil Futures: The Risks and Rewards

    Learn about the risks and rewards of trading oil futures contracts. Read about a few strategies to limit the risk in trading oil futures contracts.
  10. Trading

    Why Forward Contracts Are The Foundation Of All Derivatives

    This article expands on the complex structure of derivatives by explaining how an investor can assess interest rate parity and implement covered interest arbitrage by using a currency forward ...
RELATED FAQS
  1. What does it mean to roll a derivative contract?

    Find out more about derivative securities, how to roll forward a derivative contract and what it means when a derivative ... Read Answer >>
  2. How do futures contracts roll over?

    Learn about why futures contracts are often rolled over into forward month contracts prior to expiration, and understand ... Read Answer >>
  3. What happens when a security reaches its strike price?

    Learn more about the moneyness of stock options and what happens when the underlying security's price reaches the option ... Read Answer >>
  4. How do I set a strike price for a future?

    Find out why futures contracts don't have set strike prices like options or other derivatives, even though price change limits ... Read Answer >>
  5. Does the seller (the writer) of an option determine the details of the option contract?

    The quick answer is yes and no. It all depends on where the option is traded. An option contract is an agreement between ... Read Answer >>
  6. How do the investment risks differ between options and futures?

    Learn what differences exist between futures and options contracts and how each can be used to hedge against investment risk ... Read Answer >>
Hot Definitions
  1. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
  2. Front Running

    The unethical practice of a broker trading an equity based on information from the analyst department before his or her clients ...
  3. After-Hours Trading - AHT

    Trading after regular trading hours on the major exchanges. The increasing popularity of electronic communication networks ...
  4. Omnibus Account

    An account between two futures merchants (brokers). It involves the transaction of individual accounts which are combined ...
  5. Weighted Average Life - WAL

    The average number of years for which each dollar of unpaid principal on a loan or mortgage remains outstanding. Once calculated, ...
  6. Real Rate Of Return

    The annual percentage return realized on an investment, which is adjusted for changes in prices due to inflation or other ...
Trading Center