Rolling Calls

Rolling Calls

Posted By: Steve Burnson: November 15, 2021

 

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Rolling options is the process of moving from one call strike price and expiration on a specific stock to a different call of a different strike price and expiration on the same stock. It entails exiting the current option contract and then entering a new position immediately after or at the same time . The underlying stock or ETF is the same but a new call option is bought farther out in time and expiration. 

 

If an option trader owns the November $385 strike calls that has gone in-the-money on QQQ. They could sell this in-the-money option and buy the $400 strike December calls if they are still bullish. This is one example of rolling long calls forward to maintain position exposure if the option will expire.

 

Rolling calls can be transacted in one option transaction with many brokers that have that execution ability. 

 

Traders can also be short calls in different types of option play structures. In these plays they would roll their short call options by buying back their current one and selling a new contract farther out in strike or expiration. The purpose of rolling calls is to keep a option play sentiment bet in place by adjusting an existing position through giving a trader more time to be right or locking in current profits by closing and moving the contract. The new option position maintains the same directional market bias and bet structure.

 

Traders roll call options to lock in profits or reset to allow for more time for the play to be proven right. Options are depreciating asset due to theta decay and can’t be held forever, they must be exercised or rolled or they could eventually be executed or expire worthless. Rolling options helps extract current value and also buy more time to be right in the future. 

 

Profitable options can also change in delta exposure and the option trader may want to reset to a lower or higher delta to maintain the same amount of risk and reward parameters in the option play. As a winning option moves closer to the current price delta increases, as it moves farther away from the current price delta decreases, this may mean it is time to reset delta exposure with a new option. Options also have accelerating theta decay as expiration approaches so a trader may want to reset their options to one farther from expiration to decrease the rate of time value loss. 

 

Investors will roll covered calls by buying back to cover an out-of-the-money call option written on their shares that has little theta left to profit from and sell a new out-of-the-money call option farther out in time and strike for a continuing opportunity to profit from new premium. 

 

Rolling calls is just exiting a current call option position and rebuilding a similar one because the reason for the first play remains valid but the risk/reward exposure has changed or expiration grows near.