Rolling Stock Options

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Rolling is a widely used technique among stock option traders. Unlike stocks, each option contract has an expiration date after which it ceases to be valid. However, investors sometimes wish to hold options positions past an expiration date. To achieve this purpose, the investor rolls the stock option position.

Rolling

  • Rolling is a technique used to hold options positions through an expiration date. When rolling a position, the investor simultaneously closes out an existing option position while entering a similar position with a further expiration date. The options involved typically share almost all characteristics such as underlying stock, strike price and option type, only differing in expiration date.

Purpose

  • The basic purpose of rolling stock options is to maintain an option position. However, this strategy takes on two forms depending on the status of the existing options position. When a position is profitable, rolling allows the investor to remain in a profitable position. In the case of a losing position, rolling provides a way for the investor to remain in the market in hopes that the position will turn profitable.

Considerations

  • While rolling stock options is a method for effectively holding a position, it is an options trade and therefore entails a commission fee. Investors must remember to roll the stock option contracts before the first contract expires. Some brokers offer automatic rolling services to make it easy for investors to hold option positions.

Buying vs Selling

  • Usually, investors initiate a roll to hold a long stock option position, that is a position where they bought an option. However, there is a kind of roll involving short option positions. If an investor sells an option and it expires worthless, the investor keeps the option premium as profit. After expiration, the investor may execute a kind of roll by selling the same kind of option again.

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