What is a Rolling Option?

A rolling option is an options contract that grants a buyer the right (but not the obligation) to purchase something at a future date, as well as the choice to extend the expiration date of 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.

This term should not be confused with the practice of rolling (roll forward) options positions or hedges from one contract month to another as expiration approaches in order to maintain a particular risk exposure.

How Rolling Options Work

A rolling option is commonly used in real estate construction or land development when the developer or builder and the seller divide up a large parcel into smaller lots, and the selling price for each lot is pre-determined from the beginning of the option agreement. When an option is taken on the entire large parcel, both parties will then agree to treat each smaller parcel as an individual contract within the larger contract. A pre-determined event, such as the signing of a contract with a purchaser of an individual lot, typically triggers closing on each smaller parcel.

The rolling option is one of many different types of options agreements that involve the acquisition and development of land or real estate. Others include the straight option, interest option, and letter of credit option.

Key Takeaways

  • A rolling option is an option that gives the holder the right to extend the expiration date of the contract for a fee.
  • This type of contract is often used in real estate development and construction.
  • Developers use the rolling option to gain control of a large piece of property as it is needed for development while minimizing risk.

Example of a Rolling Option

Developers use the rolling option to gain control of a large piece of property as it is needed for development. This is often ideal for the small developer who discovers the "perfect" piece of land for a particular project, but which is too large for its immediate development in full. For example, a land developer may offer a home building company a rolling option to buy several 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.