Roll Up



Roll Up - Definition


To roll up an options contract is to close an existing options contract while simultaneously opening the same number of contracts at a higher strike price.

Roll Up - 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 up an options position simply means closing the existing position and taking position at a higher 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 up an options position mean, how to roll up an options position as well as issues to take note of when you roll up.

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What Does It Mean To Roll Up an Option?


The term "roll up" comes from the expression to "roll an option up to a higher strike price", it is professional options trading jargon for changing an existing option up to a higher strike price. When an options trader simultaneously close an existing options contract and then open the same number of contracts at a higher strike price, the options trader is said to be "Rolling Up to a higher strike price". Knowing how to and when to roll up 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 as much as possible.

Roll Up an Options Contract




How To Roll Up an Options Position?


Rolling up an options position applies to both long and short positions. You can roll up a long position and you can also roll up a short position. Rolling up also means the same thing for both call options and put options. In the case of call options, rolling up will take the call options more and more out of the money while rolling up put options will take them more and more in the money.

To roll up 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 higher strike price. Most options brokers would offer a "Roll Up" order which will prefill the options order form with the STC and BTO order with the same number of contracts.

Example of Rolling Up Long Call Position


Assuming QQQ is trading at $50 and you bought its $50 strike price call options. QQQ rallies to $60 and you are uncomfortable with your call options being so much in the money and therefore decide to roll up your call options to the $60 strike price. You Sell To Close your $50 strike price call options while simultaneously Buy To Open the $60 strike price call options, successfully rolling up your call options from the $50 strike price to the $60 strike price.

Example of Rolling Up Long Put Position


Assuming QQQ is trading at $50 and you bought its $50 strike price put options in anticipation of a correction. QQQ however, rallies to $60 and you are sure it will pull back to $50 from $60 and decides to roll up your $50 strike price put options to the $60 strike price. You Sell To Close your $50 strike price put options while simultaneously Buy To Open the $60 strike price put options, successfully rolling up your put options from the $50 strike price to the $60 strike price.


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

Example of Rolling Up 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 rallies to $60 instead and your position suffers massive losses but you are still convinced that QQQ will pullback from $60 and you decide to roll up your naked call write to the $60 strike price. You Buy To Close your $50 strike price call options while simultaneously Sell To Open the $60 strike price call options, successfully rolling up your call options from the $50 strike price to the $60 strike price.

Example of Rolling Up 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 rallies to $60 as expected and you think it will go even higher and decide to capitalize on the move by rolling up your naked put write to the $60 strike price. You Buy To Close your $50 strike price put options while simultaneously Sell To Open the $60 strike price put options, successfully rolling up your put options from the $50 strike price to the $60 strike price.


You could also roll up and forward. This means not only rolling up to a higher 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 up 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 up to a higher strike price. As options spreads can have as many as 6 legs, it can be extremely difficult to roll up without simultaneous roll up 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 Up a Bull Call Spread


Assuming QQQ is trading at $50 and in anticipation of a move to $60, you executed a 50/60 Bull Call Spread by buying the $50 strike price call options and simultaneously writing the $60 strike price call options. QQQ rallies to $60 as expected, reaching the 50/60 Bull Call Spread's maximum profit potential but you think QQQ might still move on to $70 and you wish to capitalize on that move. You decide to roll up your 50/60 Bull Call Spread to the 60/70 strike price. You Sell To Close your $50 strike price call options, Buy To Close your $60 strike price call options then simultaneously Buy To Open the $60 strike price call options and Sell To Open the $70 strike price call options. This effectively rolls up your 50/60 Bull Call Spread to the 60/70 strike price.



Purposes of Rolling Up an Options Position



Avoiding Assignment


Options writers roll up short call options positions mainly to avoid getting these (this logic does not apply to put options because rolling up put options gets them even more in the money) in the money options assigned. This is especially the case in a Covered Call where out of the money call options are written against your stock holdings. When these call options get in the money Covered Call writers normally roll up the call options to prevent their stocks from being called away.

Lets take a look at how Roll Up is used to avoid assignment in a Covered Call.

Rolling Up To Avoid Assignment In Covered Call


Assuming you own 100 shares of QQQ at $60 and you think QQQ isn't going to exceed $65 by expiration and decide to make an extra income by writing one contract of $65 strike price call options against these stocks @ $1.40. A few days later, QQQ unexpectedly rallies to $67, taking your $65 strike price short call options in the money. You are now of the opinion that QQQ would not exceed $70 and would like to roll up your short call options to the $70 strike price in order to prevent your shares from being called away and to continue making an extra profit should QQQ remain below $70 by expiration.

Assuming the $65 strike price call options are trading at $2.05 and the $70 strike price call options are trading at $0.30.

You roll up the position using the following orders:

Buy To Close $65 Call @ $2.05
Sell To Open $70 Call @ $0.30
Net cash paid to roll up = $2.05 - $0.30 = $1.75

Long Options Position Adjustments


Options traders also roll up their long options positions in the following circumstances:

1. To take profit on long call options that has gotten too deep in the money. In this case, the in the money call options are rolled up to the cheaper at the money or out of the money strike price allowing the options trader to not only continue speculating to upside but also allow the options trader to pocket the difference in price as profit.

Rolling Up To Take Profit


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 rallies as expected to $70 and your $65 strike price call options are now worth $5.05. You decide to take profit and still continue this upside speculation by rolling up to the $70 strike price which is trading at $1.50 now.

You made the following trades:

Sell To Close $65 Call @ $5.05
Buy To Open $70 Call @ $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 $70 Calls)

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

Rolling Up For Stop Loss & Continued Downside Speculation


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 rallies unexpectedly to $70 and your $65 strike price put options are now worth $0.05. You believe QQQ will correct downwards moderately from $70 but the current put 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 downwards move. You decide to roll up the put options to the $70 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 Put @ $0.05
Buy To Open $70 Put @ $1.50
Net cash paid = $150 - 5 = $145



Issues to Take Note of When Rolling Up an Options Position


There are several notable issues to take note of when rolling up 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 up to. This always happen when an options trader closes an existing position before opening the new options position at the higher 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 higher 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 higher strike price options to be opened without chasing up the price.

Example of Slippage When Rolling Up a Long Call Option


Assuming QQQ is trading at $50 and you bought its $50 strike price call options. QQQ rallies to $60 and you are uncomfortable with your call options being so much in the money and therefore decide to roll up your call options to the $60 strike price which is asking at $1.20. You Sell To Close your $50 strike price call options before Buying To Open the $60 strike price call options and found that because of the timing difference between the two orders, the $60 strike price call 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 higher strike price options that you are rolling up to. When rolling up means getting more in the money such as in the case of rolling up put options, the options that you are rolling up 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 higher strike price options gives you more cash in your account instead.

Example of Difference In Pricing When Rolling Up



Long Call Options

Assuming QQQ is trading at $50 and you bought one contract of its $50 strike price call options. QQQ rallies to $60 and you are uncomfortable with your call options being so much in the money and therefore decide to roll up your call options to the $60 strike price. The $50 strike price call options are now worth $10.05 and the $60 strike price call options worth $1.20. You Sell To Close your $50 strike price call options while simultaneously Buy To Open the $60 strike price call options, successfully rolling up your call options from the $50 strike price to the $60 strike price.

There is a huge positive difference in price in this roll up and the net cash effect of rolling up this position is:

$1005 - $120 = $885 cash deposited in your account along with one contract of $60 strike price call 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. Instead of dropping, QQQ rallies to $60 thus sustaining heavy losses. However, you are certain that QQQ will pullback from the $60 mark and decides to roll up your naked call write to the $60 strike price. The $50 strike price call options are now worth $10.05 and the $60 strike price call options worth $1.20. You Buy To Close your $50 strike price call options while simultaneously Sell To Open the $60 strike price call options, successfully rolling up your call options from the $50 strike price to the $60 strike price.

There is a huge negative difference in price in this roll up and the net cash effect is:

$1005 - $120 = $885 cash deducted from your account in order to own one short contract of $60 strike price call 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 rise moderately. QQQ turns out more bullish than expected and rallies to $60. You believe QQQ will continue rising and therefore decide to roll up your short put options to the $60 strike price in order to continue profiting from the move. The $50 strike price put options are now worth $0.05 and the $60 strike price put options worth $1.20. You Buy To Close your $50 strike price put options while simultaneously Sell To Open the $60 strike price put options, successfully rolling up your put options from the $50 strike price to the $60 strike price.

There is a huge positive difference in price in this roll up 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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