What Is an Options Roll Up?
It is the opposite of an options roll down, where an investor simultaneously closes one position and opens another with a lower strike price.
- An options roll up closes out an options position in one strike in order to open a new position in the same type of option at a higher strike price.
- A roll up on a call option or a put option is a bullish strategy, while a roll down on a call or put option is a bearish strategy.
- An options roll up strategy is typically deployed in response to changing market conditions.
Understanding an Options Roll Up
An options roll up, which is short for "roll an option up to a higher strike price," refers to increasing the strike price of an option position by closing out the initial contract and opening a new contract for the same underlying asset at a higher strike price. 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 that could occur while putting on the strategy.
Whether the existing position is a put or a call, the procedure for rolling up is the same. A roll up on a call option is a bullish strategy because you are betting that the price will continue to rise to the new, higher strike. It is also a bullish trade when rolling up put options, since moving to a higher strike indicates you don't believe the price will drop lower.
When rolling up a call option, the trader should ensure that the net cost of the new position is lower than the profit generated from closing the old position, given that the higher strike, out-of-the-money (OTM) call premium should be less. Conversely, new put contracts would also cost more in a roll up than that of 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.
How an Options Roll Up Works
To initiate an options roll up, the trader can either set up simultaneous "sell to close" and "buy to open" orders to exit an existing long position while opening a new long position at a higher strike, or set up simultaneous 'buy to close" and "sell to open" orders to exit an existing short position while opening a new short position at a higher strike.
There are several reasons why a trader would roll up a position, including to avoid exercise on short call positions or to simply increase bullishness for a long call position. Remember that an in-the-money (ITM) long call loses most of its time value, so rolling to an OTM 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 asset 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 Options Rolls
Options traders use various rolling strategies to respond to changing market conditions, secure profits, limit losses and manage risk.
Traders can also 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 asset and expiration date, but at a lower price.
In addition, traders can roll forward a position by keeping the strike price the same while 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." Conversely, if the new contract is one with a lower strike price and later expiration date, it is called a "roll-down and forward."