Rolling Option

DEFINITION of 'Rolling Option'

A contract that offers a buyer the right to purchase something at a future date, as well as the choice to extend that right, for a fee. Rolling options are most commonly used in real estate construction and development. They allow builders to reduce the risk of buying and holding large tracts of land before they know if anyone will be interested in purchasing whatever they construct.

BREAKING DOWN 'Rolling Option'

For example, a land developer may offer a homebuilding company a rolling option to buy lots. If the builder quickly sells the homes it builds on those initial lots, it may exercise the option and purchase additional lots. If the homes aren't selling as quickly as the builder hoped, but the market still looks favorable, the builder may pay a fee to roll the option forward another year, or whatever time period was agreed upon in the contract. This way, the builder maintains the option to buy more land, but doesn't make the financial commitment of actually purchasing the land.