What is an Options Roll Up
A roll up on a call option is a bullish strategy. This is the opposite of a "roll down" in which an investor simultaneously closes one position and opens another with a lower strike price. The converse would be true for put options where a roll up would be a bearish strategy.
BREAKING DOWN Options Roll Up
Whether the existing position is puts or calls, the procedure for rolling up is the same. Also, the trader executes both legs simultaneously, in order to reduce slippage or profit erosion due to a change in the price of the underlying asset.
When rolling calls, the new position will be cheaper than the old position, due to the higher strike. New put contracts will cost more in a roll up than the old put contracts. Depending on whether the old and new positions are long or short, the result of a roll up could be a debit or a credit to the account. How much depends on the price differential of the rolled options.
There are several reasons why a trader would roll up a position, which includes avoiding exercise on short call positions. Or, it simply could be an expression of increased bullishness for a long call position. Remember that an in-the-money long call loses most of its time value, so rolling to an out-of-the money call would give the trader partial profits and possibly more bang for the buck, thanks to the lower price of the new calls.
A long put position might roll to a higher strike if the underlying moved higher in price but the trader still believes it will eventually fall. In this way, the position remains in place with losses cut somewhat.
Traders should note that the spreads between the prices of options with different strikes vary. Some market conditions will not be as conducive for rolling up as others.
Other Types of Rolls
Traders can roll down a position in much the same way as they can roll up. This strategy simply involves closing the original position and opening a new position with the same underlying and expiration date but at a lower price.
Traders can roll forward a position by keeping the strike price the same but extending to a longer expiration date.
If the new contract involves a higher strike price and a later expiration date, the strategy is called a "roll-up and forward." If the new contract is one with a lower strike price and later expiration date, it is called a "roll-down and forward."
Options traders use rolling strategies to respond to changing market conditions and to secure profits, limit losses, and manage risk.