Roll Down

What Does It Mean To Roll Down in Options Trading?

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Roll Down - Definition

To Roll Down an options contract is to close an existing options contract while simultaneously opening the same number of contracts at a lower strike price.

Roll Down - Introduction

Rolling up, rolling down and rolling forward are the three strategic actions options traders take in order to manage their options positions. To Roll Down an options position simply means closing the existing position and taking position at a lower strike price. Such action is useful and sometimes necessary when trading options strategies which requires the position to always be near the money in order to optimize profits.

This tutorial shall explore in depth what rolling down an options position mean, how to Roll Down an options position as well as issues to take note of when you Roll Down.

What Does It Mean To Roll Down an Option?

The term "Roll Down" comes from the expression to "roll an option down to a lower strike price". It is professional options trading jargon for changing an existing options contract down to a lower strike price. When an options trader simultaneously close an existing options contract and then open the same number of contracts at a lower strike price, the options trader is said to be "Rolling Down to a lower strike price". Knowing how to and when to Roll Down an options contract can be crucial to the profitability of certain options strategies which require the strike price of the options involved to be relatively near the price of the underlying stock.

How To Roll Down an Options Position?

Rolling down an options position applies to both long and short options positions. You can Roll Down long options positions as well as short options positions. Rolling down also means the same thing for both call options and put options. In the case of call options, rolling down will take the call options more and more in of the money while rolling down put options will take them more and more out of the money.

To Roll Down a long options position, all you have to do is to set up a simultaneous order to Sell To Close (STC) the existing long position and Buy To Open (BTO) the new position at a lower strike price. Most options brokers would offer a "Roll Down" order (or simply "Roll") which will prefill the options order form with the appropriate STC and BTO order and the same number of contracts.

Example of Rolling Down Long Call Position Assuming QQQ is trading at $50 and you bought its $50 strike price call options in anticipation of a rally. QQQ however, drops down to $45 but you are sure QQQ will stage a small rally from $45 onwards and therefore decide to Roll Down your call options to the $45 strike price in order to better capture the move on a higher delta value. You Sell To Close your $50 strike price call options while simultaneously Buy To Open the $45 strike price call options, successfully rolling down your call options from the $50 strike price to the $45 strike price. Example of Rolling Down Long Put Position Assuming QQQ is trading at $50 and you bought its $50 strike price put options in anticipation of a correction. QQQ drops to $45 as expected and you are uncomfortable with the $50 strike price put options being so much in the money, risking an assignment, and decides to Roll Down your $50 strike price put options to the $45 strike price in order to continue speculation to downside. You Sell To Close your $50 strike price put options while simultaneously Buy To Open the $45 strike price put options, successfully rolling down your put options from the $50 strike price to the $45 strike price.

To Roll Down a short options position,all you have to do is to set up a simultaneous order to Buy To Close (BTC) the existing short options position and Sell To Open (STO) the new short position at a lower strike price. Similarly, most options brokers would offer a direct "Roll Down" order which prefills the order form with the appropriate orders and contracts, leaving you to fill in only the contract you wish to Roll Down to.

Example of Rolling Down Short Call Position Assuming QQQ is trading at $50 and you wrote its $50 strike price call options in anticipation of a short pullback. QQQ drops to $45 as expected and you are certain the QQQ will drop further and you decide to Roll Down your naked call write to the $45 strike price in order to optimize profits should QQQ continue to drop. You Buy To Close your $50 strike price call options while simultaneously Sell To Open the $45 strike price call options, successfully rolling down your call options from the $50 strike price to the $45 strike price. Example of Rolling Down Short Put Position Assuming QQQ is trading at $50 and you wrote its $50 strike price put options in anticipation of a short rally. QQQ drops to $45 instead resulting in losses in your short put options which is now in the money. You are of the opinion that the QQQ will stage a small rally from $45 upwards. In order to capitalize on that move and avoid risking an assignment due to holding the in the money short put options, you decide to roll down your naked put write to the $45 strike price. You Buy To Close your $50 strike price put options while simultaneously Sell To Open the $45 strike price put options, successfully rolling up your put options from the $50 strike price to the $45 strike price.

You could also Roll Down and forward. This means not only rolling down to a lower strike price but also roll forward to a further expiration month. Options traders usually do this near expiration in order to continue speculation at a higher strike price into the new month.

Things get a little more complex when rolling down an options spread position. An options spread consists of both long and short options working together as a strategic position and sometimes it may be necessary to roll an entire options spread down to a lower strike price. As options spreads can have as many as 6 legs, it can be extremely difficult to Roll Down without simultaneous Roll Down order offered by a good options broker. Each leg in an options spread needs to be closed out using the correct orders and re-established at the higher strike prices. This can be tricky for beginners to options trading.

Example of Rolling Down a Bear Put Spread Assuming QQQ is trading at $50 and in anticipation of a drop to $45, you executed a 50/45 Bear Put Spread by buying the $50 strike price put options and simultaneously writing the $45 strike price put options. QQQ drops to $45 as expected, reaching the 50/45 Bear Put Spread's maximum profit potential and you are of the opinion that QQQ might still move on down to $40 and you wish to capitalize on that move. You decide to Roll Down your 50/45 Bear Put Spread to the 45/40 strike price. You Sell To Close your $50 strike price put options, Buy To Close your $45 strike price put options then simultaneously Buy To Open the $45 strike price put options and Sell To Open the $40 strike price put options. This effectively rolls down your 50/45 Bear Put Spread to the 45/40 strike price.

Purposes of Rolling Down an Options Position

Avoiding Assignment

Options writers Roll Down short put options positions mainly to avoid getting these (this logic does not apply to call options because rolling down call options gets them even more in the money) in the money options assigned. This is especially the case in the Naked Put Write strategy described in previous examples.

Long Options Position Adjustments

Options traders also Roll Down their long options positions in the following circumstances:

1. To take profit on long put options that has gotten too deep in the money. In this case, the in the money put options are rolled down to the cheaper at the money or out of the money strike price in order to allow the options trader continued speculation to downside and also to pocket the difference in price as profit.

Rolling Down To Take Profit Assuming you bought one contract of QQQ's $65 strike price put options at $1.40 when QQQ was trading at $65, expecting the price of QQQ to go downwards. QQQ drops as expected to $60 and your $65 strike price put options are now worth $5.05. You decided to take profit and continue this downside speculation by rolling down to the $60 strike price which is trading at $1.50 now. You made the following trades: Sell To Close $65 Put @ $5.05 Buy To Open $60 Put @ $1.50 Net cash received = $505 - $150 = $355 Net profit = $505 - $140 = $365 (cash received is lower than net profit because part of the profit has gone into buying the new $60 Puts)

2. To stop loss on losing long Call options which has gotten out of the money and to continue speculation to upside at a lower strike price. In this case, the cheaper out of the money call options are rolled down for two reasons. One, to maintain a high positive delta value for upside speculation. Two,to salvage remaining value in the losing position as a form of stop loss.

Rolling Down For Stop Loss & Continued Upside Speculation Assuming you bought one contract of QQQ's $65 strike price call options at $1.40 when QQQ was trading at $65, expecting the price of QQQ to go upwards. QQQ drops unexpectedly to $60 and your $65 strike price call options are now worth only $0.05. You believe QQQ will rally moderately from $60 but the current call options position is so far out of the money that it has only about 0.10 delta which isn't sensitive enough to capture profit on a moderate upwards move. You decide to Roll Down the call options to the $60 strike price which has a delta value of 0.50, allowing you to also stop loss and salvage the remaining $0.05 on the losing position. You made the following trades: Sell To Close $65 Call @ $0.05 Buy To Open $60 Call @ $1.50 Net cash paid = $150 - 5 = $145

Issues to Take Note of When Rolling Down an Options Position

There are several notable issues to take note of when rolling down an options position. They are:

Slippage

Slippage is a difference in filling price of the new options due to a delay in the execution of the options that you are rolling down to. This always happen when an options trader closes an existing position before opening the new options position at the lower strike price as seperate orders, one after another. This is why simultaneous orders are so important and why good options brokers definitely offer such a function. In a strong moving market, slippage may mean opening the lower strike price position at a price much worse than you have planned for. Slippage may also occur as a result of using very restrictive limit orders which makes it impossible for the lower strike price options to be opened without chasing up the price.

Example of Slippage When Rolling Down a Long Put Option Assuming QQQ is trading at $50 and you bought its $50 strike price put options. QQQ drops to $40 and you are uncomfortable with your put options being so much in the money and therefore decide to Roll Down your put options to the $40 strike price which is asking at $1.20. You Sell To Close your $50 strike price put options before Buying To Open the $40 strike price put options and found that because of the timing difference between the two orders, the $40 strike price put options are now asking at $1.40, resulting in a slippage of $0.20 which could have been prevented using a simultaneous order.

Difference in Pricing

There is always a difference in the price between the options position you are holding now and the lower strike price options that you are rolling down to. When rolling down means getting more in the money such as in the case of rolling down put options, the options that you are rolling down to will be more expensive than the options you are closing out of and that may result in you not being able to open as many contracts as the position you are closing out of. Of course this won't be a problem if it is a short position you are rolling as closing out the cheaper existing options and opening the more expensive lower strike price put options gives you more cash in your account instead.

Example of Difference In Pricing When Rolling Down Long Put Options Assuming QQQ is trading at $50 and you bought one contract of its $50 strike price put options. QQQ drops to $40 and you are uncomfortable with your put options being so much in the money and therefore decide to Roll Down your put options to the $40 strike price. The $50 strike price put options are now worth $10.05 and the $40 strike price put options worth $1.20. You Sell To Close your $50 strike price put options while simultaneously Buy To Open the $40 strike price put options, successfully rolling down your put options from the $50 strike price to the $40 strike price. There is a huge positive difference in price in this Roll Down and the net cash effect of rolling down this position is: $1005 - $120 = $885 cash deposited in your account along with one contract of $40 strike price put options. Short Put Options Assuming QQQ is trading at $50 and you wrote one contract of its $50 strike price put options expecting QQQ to rally moderately. Instead of rallying, QQQ drops to $40 thus sustaining heavy losses. However, you are certain that QQQ will rally from the $40 mark and decides to Roll Down your naked put write to the $40 strike price. The $50 strike price put options are now worth $10.05 and the $40 strike price put options worth $1.20. You Buy To Close your $50 strike price put options while simultaneously Sell To Open the $40 strike price put options, successfully rolling down your short put options from the $50 strike price to the $40 strike price. There is a huge negative difference in price in this Roll Down and the net cash effect is: $1005 - $120 = $885 cash deducted from your account in order to own one short contract of $40 strike price put options. Short Call Options Assuming QQQ is trading at $50 and you wrote one contract of its $50 strike price call options expecting QQQ to drop moderately. QQQ turns out more bearish than expected and drops to $40. You believe QQQ will continue dropping and therefore decide to Roll Down your short call options to the $40 strike price in order to continue profiting from the move. The $50 strike price call options are now worth $0.05 and the $40 strike price call options worth $1.20. You Buy To Close your $50 strike price call options while simultaneously Sell To Open the $40 strike price call options, successfully rolling down your call options from the $50 strike price to the $40 strike price. There is a huge positive difference in price in this Roll Down and the net cash effect is: $120 - $5 = $115 cash deposited into your account as you bought back the existing options for only $5 and sold new ones for $120.

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