Smart Investor: rolling options: a strategy for managing risk and extending profit potential Smart Investor: rolling options: a strategy for managing risk and extending profit potential Smart Investor: rolling options: a strategy for managing risk and extending profit potential

Smart Investor: rolling options: a strategy for managing risk and extending profit potential

Options 10 minutes to read
Koen Hoorelbeke

Options Strategist

Summary:  Learn how rolling options can help you manage risk and extend profit potential by adjusting positions without fully exiting the trade. This article explores key strategies like rolling covered calls and provides practical steps for initiating and customizing a roll.


Options are complex, high-risk products and require knowledge, investment experience and, in many applications, high risk acceptance. We recommend that before you invest in options, you inform yourself well about the operation and risks.
 

Rolling options: a strategy for managing risk and extending profit potential

In the ever-changing landscape of options trading, “rolling” an option is a common yet often misunderstood tactic. Whether you're new to options or a seasoned trader, understanding how to roll options effectively can help you manage risk, secure profits, and extend your market exposure. In this article, we’ll explore what rolling an option entails, the various strategies involved, and why this technique is a valuable part of any trader’s toolkit.

What does it mean to roll an option?

At its core, rolling an option means closing an existing option position and opening a new one, typically with a different expiration date or strike price. This action allows traders to maintain their exposure to the market while adjusting the terms of their position. It’s essentially a tactical move, designed to adapt to changing market conditions without fully exiting the trade.

As discussed in the Option Talk podcast, rolling involves “substituting one position with another.” This process is executed within the same order ticket—closing the current position while simultaneously opening a new one. Whether you're adjusting a bullish, bearish, or neutral strategy, rolling gives you the flexibility to recalibrate your approach. Listen to the full episode here.

How to Initiate a roll in your trading platform

You can initiate a roll option by right-clicking on a position in your positions list. This action opens a context menu where you can select the “Roll Option” feature, as shown in the screenshot below:

After selecting the "Roll Option," you will be presented with the strategy window, which allows you to customize how you roll the position. You can decide whether to roll to the same expiry, change the strike price, or roll to the next expiry, as shown in the example below:

These two simple steps are crucial for initiating and configuring a rolling strategy based on your market outlook.

The mechanics of rolling: when and why to do it

There are several reasons a trader might choose to roll an option, and these generally fall into two categories: offensive and defensive rolls. Understanding the difference between these approaches can help you make better decisions when market dynamics shift.

  1. Offensive rolls: locking in gains while staying invested

An offensive roll occurs when your option position is performing well, and you want to continue participating in the market’s potential upside. Let’s say you’re holding a long call option on a stock like NVIDIA, and the stock has surged since you bought it. You’ve made a profit on your current call, but you believe there’s still more room for the stock to run.

Instead of simply closing the position and taking your profits, you could roll the call. This means selling your current option (to lock in the profit) and buying another call with a later expiration date or a higher strike price. By doing this, you maintain a bullish stance while adjusting the position to suit your outlook on the stock’s future.

“You’re protecting your profit because you took your profit in the call you sold, but you still have a bullish view.” Rolling in this manner allows traders to capture more potential gains without the need for additional investment, depending on how the new position is structured.

  1. Defensive rolls: mitigating losses and buying time

On the other hand, defensive rolls come into play when a position isn’t moving in the desired direction. For example, imagine you’ve sold a put on a stock, expecting it to remain stable or rise. However, the stock has started to decline, and you’re now facing the possibility of assignment (having to purchase the stock at the strike price).

In this case, you could roll the put by buying back the current contract and selling a new one at a lower strike price with a later expiration date. This “down and out” adjustment gives you more time for the stock to recover, while reducing your risk of assignment. This type of roll is typically used to “postpone the loss,” giving the trade a second chance to succeed.

While this can be an effective strategy, it’s not without risks. Continually rolling a losing position can sometimes exacerbate losses, especially if the market continues to move against you. It’s important to avoid using defensive rolls simply as a way to delay taking necessary losses.

Rolling covered calls: a key strategy for income and flexibility

Rolling covered calls is a particularly popular strategy for traders and investors who hold long positions in stocks and want to generate additional income or adjust their exposure. A covered call involves selling call options against a stock position you already own. This is a conservative strategy that generates income from the premium received for selling the call, while still allowing some upside potential if the stock price appreciates.

Why roll a covered call?

There are several reasons why an investor might choose to roll a covered call:

  • Protect against assignment: if the stock price rises above the strike price of the sold call, the investor may face assignment and be forced to sell their shares. By rolling the call up and out—buying back the existing call and selling a new one with a higher strike and later expiration—the investor can avoid assignment while maintaining their position in the stock.
  • Generate additional income: rolling the call to a new strike price and expiration date can generate additional premium income. This can be particularly useful if the original call is nearing expiration, and the investor wants to continue the strategy of generating income from the stock position.
  • Adjust market exposure: if the investor’s outlook on the stock has changed (e.g., they now expect a slower rate of appreciation), they might roll the call to a lower strike price to capture more premium, or to a higher strike price if they believe there’s greater upside potential.

Example of rolling a covered call

Let’s consider a practical example:

Imagine you own 100 shares of ABC Corp, currently trading at $100 per share. You initially sold a covered call with a strike price of $105, expiring in two weeks, and collected a $2 premium per share. If ABC rises to $107 as expiration approaches, your call is in the money, and you’re at risk of having to sell your shares at $105.

To avoid this, you could roll the call by buying back the original option and selling a new call with a $110 strike price and an expiration date two months out. This action accomplishes several things:

  1. Protects against assignment: by moving the strike price higher, you avoid being forced to sell your shares at $105.
  2. Allows more upside: the new $110 strike price allows you to participate in further appreciation of ABC’s stock.
  3. Generates additional income: the longer expiration date and higher strike price mean you can still collect a decent premium, perhaps even more than the original $2.

This is a common strategy for investors who want to hold onto their stock positions while continuing to generate income.

When not to roll a covered call

While rolling covered calls can be advantageous, it’s not always the best course of action. Here are some scenarios where rolling might not make sense:

  • Changing market outlook: if you no longer believe in the stock’s growth potential or expect it to decline, it may be better to close the position entirely rather than rolling.
  • Cost of rolling: if the cost of buying back the original call is too high relative to the new premium you can receive, rolling may not be worthwhile.

Key considerations when rolling options

Rolling options is not a guaranteed way to avoid losses or guarantee profits. Timing is critical. “If you wait too long, your rolling options become limited, especially with strikes and expiration dates.” It’s also important to have a clear outlook on the underlying asset. Rolling just to delay losses, without a solid view of the stock or index's future, can lead to larger losses in the long run.

Should you always roll?

Not necessarily. While rolling is a useful tool, it is not always the best course of action. Sometimes it’s better to take your profits or cut your losses. Rolling should be done with a clear strategy in mind, whether it's to extend profits or manage risk.

Final thoughts

Rolling options, especially covered calls, is a sophisticated strategy that can help traders extend profits or mitigate losses. However, it requires careful planning and a good understanding of market dynamics. Whether you're making an offensive move to capitalize on future potential or a defensive one to manage risk, rolling can be a flexible addition to your trading toolkit.

As with any options strategy, rolling requires both discipline and flexibility. When used correctly, it can be a powerful way to maintain your market exposure while adapting to changing conditions. Just remember, rolling is not a foolproof way to escape risk—sometimes, the best option is to cut your losses and move on.
Check out these guides and case studies:
In-depth guide to using long-term options for strategic portfolio management  Our specialized resource designed to learn you strategically manage profits and reduce reliance on single (or few) positions within your portfolio using long-term options. This guide is crafted to assist you in understanding and applying long-term options to diversify investments and secure gains while maintaining market exposure.
Case study: using covered calls to enhance portfolio performance  This case study delves into the covered call strategy, where an investor holds a stock and sells call options to generate premium income. The approach offers a balanced method for generating income and managing risk, with protection against minor declines and capped potential gains.
Case study: using protective puts to manage risk  This analysis examines the protective put strategy, where an investor owns a stock and buys put options to safeguard against significant declines. Despite the cost of the premium, this approach offers peace of mind and financial protection, making it ideal for risk-averse investors. 
Case study: using cash-secured puts to acquire stocks at a discount and generate income  This review investigates the cash-secured put strategy, where an investor sells put options while holding enough cash to buy the stock if exercised. This method balances income generation with the potential to acquire stocks at a lower cost, appealing to cautious investors.
Case study: using collars to balance risk and reward This study focuses on the collar strategy, where an investor owns a stock, buys protective puts, and sells call options to balance risk and reward. This cost-neutral approach, achieved by offsetting the cost of puts with the premiums from calls, provides a safety net and additional income, making it suitable for cautious investors. 
Previous "Investing with options" articles
"Saxo Options Talk" podcast
Other related articles
Why options strategies belong in every trader's toolbox
Understanding and calculating the expected move of a stock ETF index 
Understanding Delta - a key guide for Investors and Traders
 

Options are complex, high-risk products and require knowledge, investment experience and, in many applications, high risk acceptance. We recommend that before you invest in options, you inform yourself well about the operation and risks. In Saxo Bank's Terms of Use you will find more information on this in the Important Information Options, Futures, Margin and Deficit Procedure. You can also consult the Essential Information Document of the option you want to invest in on Saxo Bank's website. 

Quarterly Outlook 2024 Q3

Sandcastle economics

01 / 05

  • Macro: Sandcastle economics

    Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.

    Read article
  • Bonds: What to do until inflation stabilises

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain inflation and evolving monetary policies.

    Read article
  • Equities: Are we blowing bubbles again

    Explore key trends and opportunities in European equities and electrification theme as market dynamics echo 2021's rally.

    Read article
  • FX: Risk-on currencies to surge against havens

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperform in Q3 2024.

    Read article
  • Commodities: Energy and grains in focus as metals pause

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities in Q3 2024.

    Read article

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)

Saxo
40 Bank Street, 26th floor
E14 5DA
London
United Kingdom

Contact Saxo

Select region

United Kingdom
United Kingdom

Trade Responsibly
All trading carries risk. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more
Additional Key Information Documents are available in our trading platform.

Saxo is a registered Trading Name of Saxo Capital Markets UK Ltd (‘Saxo’). Saxo is authorised and regulated by the Financial Conduct Authority, Firm Reference Number 551422. Registered address: 26th Floor, 40 Bank Street, Canary Wharf, London E14 5DA. Company number 7413871. Registered in England & Wales.

This website, including the information and materials contained in it, are not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in the United States, Belgium or any other jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation.

It is important that you understand that with investments, your capital is at risk. Past performance is not a guide to future performance. It is your responsibility to ensure that you make an informed decision about whether or not to invest with us. If you are still unsure if investing is right for you, please seek independent advice. Saxo assumes no liability for any loss sustained from trading in accordance with a recommendation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc. Android is a trademark of Google Inc.

©   since 1992