Rolling Strategies

Last modified 11:50, 5 Nov 2012

Rolling Strategies

Rolling basically means moving. In options trading there are two types of rolling that can occur.

  1. Vertical Roll,
  2. Horizontal Roll.

A Vertical roll refers to adjusting a trade by moving the strike point of an existing trade to another strike point in the same expiration month. Thus, the term vertical refers to moving the strike up or down the option chain within the same month.

A Horizontal roll refers to closing a near term option and opening another option further out in time. It is mainly used when trading time spread strategies where there are front month options that expire before back month options or covered strategies where stock is used in conjunction with options. The same or different strikes can be used when rolling trades horizontally.

Why Do You Roll Options?

Options are generally rolled when market analysis dictates that trade adjustments are required. The most common reason to roll a strategy is when the front month option expires and there are still back month options or stock positions active.

For example, a time spread or “Calendar Spread” strategy consists of buying a long dated option and selling a short dated option. As the short dated option's expiration approaches, there can be either one of two outcomes. Either the short option could be out-of-the-money or in-the-money.

If the option is out-of the-money, it is worthless. The trader simply sells the next month's option, after letting the option expire.

Alternatively if the option ends up in-the-money, the trader needs to sell the next month's option after buying back the short option. Even though that sort of trade consists of two trades, buying and selling, it is considered one trade. It is also known as a spread. Traders will need to utilize such a spread to roll out the time spread.

Your SOFTWARE has two ways to handle the rolling of options within the Option Analysis work pages.

  1. Use the Close To Exit command, or
  2. Use the Adjustments Table.

Rolling option trades will become a fundamental trading skill after learning more advanced trading strategies. It is important that traders know how to model trade rollovers within the software.

Roll Using Close To Exit Command

The Close To Exit command is a quick way to Close or Roll a trade leg and is accessed via the pop up menu on the Options Analysis option chain tables. By using the Close To Exit command, all trade details are automatically populated with the offsetting details to close out the trade. This method of rolling trade strategies will be demonstrated via a Calendar Spread trade.

The following example trade shows a Calendar trade at the expiry date of the front month option.

optanlys_Roll1.png

This front month option has finished in-the-money and will need to be rolled over into the next month. To model this process using Your SOFTWARE, traders will need to “Close to Exit” the expiring option and “Sell to Open” the following month’s option.

optanlys_Roll2.png

Select the open leg from the option data table and right mouse click to show the pop-up menu. Click Close To Exit which will open the Enter Transaction dialog.

optanlys_Roll3.png

The Enter Transaction dialog will automatically be populated with the details to close out the trade. The Entry/Exit field will be set to Exit and grayed out. The Contracts field will default to the total number of contracts traded. The Price field will default to the Bid quote if a Sell trade is invoked or the Ask quote if a Buy trade is required.

Both the Contracts and Price fields can be edited. In this case, the price could be changed to the actual market price which the option was closed out for.

Click on the Ok button and the software will automatically close out the number of contracts entered in the trade and at the specified price. A new Exit Transaction will be added to the Strategy Summary table.

optanlys_Roll4.png

After closing out the front month option, the following month’s option can be sold which will complete the rollover process.

optanlys_Roll5.png

Select the subsequent month’s option to trade and click the Minus (-) key on the keyboard to “Sell To Open” a new option leg. A new Entry Transaction will be added to the Strategy Summary table completing the rollover process.

The new risk graph shows the risk profile of the rolled trade with the new front month option in place.

optanlys_Roll6.png

Roll Using Adjustments Table

The second way to model trade rollovers in Your SOFTWARE is to use the Adjustments Table. The Adjustments Table serves multiple purposes within Your SOFTWARE and one of which is to model the Closing of option trades. Therefore, it can be used to rollover options. Once again, this method of rolling trade strategies will be demonstrated via a Calendar Spread trade.

The following example trade shows a Calendar trade at the expiry date of the front month option.

optanlys_Roll1.png

This front month option has finished in-the-money and will need to be rolled over into the next month. To model this process using Your SOFTWARE, traders will need to “Close to Exit” the expiring option and “Sell to Open” the following month’s option and can be done via the Adjustments Table.

optanlys_Roll7.png

Select the open leg from the option data table and right mouse click to show the pop-up menu. Click Adjust which will open the Adjust Transactions dialog.

optanlys_Roll8.png

The Adjust Transactions dialog will display the current expiring option. Click the New button to add a trade to offset the expiring option.

optanlys_Roll9.png

A New Entry will be added to the Adjustment table. Ensure that the new trade is highlighted in the Adjustment table and click the Edit button which will open the Edit Transaction dialog.

optanlys_Roll10.png

The Edit Transaction dialog will open with all fields enabled.

The Contracts field will need to be set to the number of contracts required to exit the trade. In the example trade, it is set to 1.

The Entry/Exit field will need to be set to Exit. This ensures the trade will be marked as a Closing trade.

The Type field can also be set to Buy or Sell. The example trade requires a Buy to Exit so this field will be left as is.

The Price field will default to the Ask quote when the Type is set to Buy. This field can also be modified to the actual market price the option was traded for.

optanlys_Roll11.png

Click on the Close button and an Exit trade will be created in the Adjust Transactions table with the offsetting trade details shown. For the example trade, the closing trade is to Buy To Exit 1 @ $5.40.

optanlys_Roll12.png

Click on the Close button and the software will automatically close out the number of contracts entered in the trade at the specified price. A new Exit Transaction will be added to the Strategy Summary table.

optanlys_Roll4.png

After closing out the front month option, the following month’s option can be sold which will complete the rollover process.

Select the subsequent month’s option to trade and click the Minus (-) key on the keyboard to “Sell To Open” a new option leg. A new Entry Transaction will be added to the Strategy Summary table completing the rollover process.

optanlys_Roll5.png

The new risk graph shows the risk profile of the rolled trade with the new front month option in place.

optanlys_Roll6.png

After performing all the above steps, it can be seen that using the Adjustments Table to close out a trade requires more steps than the Close To Exit command. Thus, it is recommended that the Close To Exit command be used to Close or Rollover trading strategies.

Page statistics
638 view(s) and 5 edit(s)
Social share
Share this page?

Tags

This page has no classifications.

Comments

You must to post a comment.

Attachments