After nearly 18 years that in the investment education industry, option rolling is one “trick of the trade” that few investors use. If rolling is discussed, it’s typically from a standpoint of weakness. That means that they’re looking to “fix” a losing trade and rolling by significantly increasing risk. What I’m about to discuss is a rolling strategy that is a proven pathway to lower risk and increase profitability.

Option Rolling Example

Option rolling involves maintaining the initial construct of the trade, but adjusting the strike price, expiration or both. The purpose of the roll is to extend the timeframe to do what you expect or to remove profits in the trade incrementally.

One of the simplest examples of a roll is with a single long option. If a trade moves in your direction, you have the ability trade off your now higher delta for money. This exchange allows you to move your delta back to where it was originally for a credit. Here’s an example using a Tilray Inc (Nasdaq: TLRY) 19 JUN 20 $6 call that I bought on March 19, 2020 for $0.58.

In this example, the stock moved favorably, and the price of my $6 call option went to $3.20. Here is a screenshot of the rolling order:

That’s a homerun and could have been closed. However, I wanted to play an even larger potential move over a longer period of time. The roll allowed me to cover my initial cost of $0.58 plus capture an additional $0.63. The trade-off that was made was replacing my ITM delta (> 0.50) for an OTM delta (< 0.50).  If I lost all the remaining value, it would still be a trade that made over 100% return on risk.

Option Rolling Orders

You’ll notice that the trade was a vertical order. A vertical means that you’re trading different strikes within the same expiration. However, the type of order entered could be one of the following:

• Vertical roll—same expiration, different strike price
• Calendar roll—same strike price, different expiration
• Diagonal roll—different strike price, different expiration

For the vertical roll, you have plenty of time to expiration and just want to lower your option delta for a credit.

A calendar roll can be used when the trade hasn’t really moved in your favor and you need some extra time. A calendar roll is usually done for a small debit.

Using a diagonal roll means that the price has moved in your favor but your extending the amount of time to expiration in order to reduce your time decay. A diagonal roll can be done for a credit or a small debit.

Back to the Option Rolling Example

In the trade example I was using on TLRY, I never had the chance to use a diagonal roll, but you’ll see that I used both a vertical roll and a calendar roll before exiting on June 5, 2020.

As you look to the yellow text on the right-hand side of the order, you’ll see the type of roll that was made along with the entry and exit.

There's a chance that I would have made more money holding the original option that I bought. However, I would have had to carry my profits and risk throughout the duration of the trade. By rolling, I was able to eliminate my risk and book a 108% profit within a week.

Conclusion

Option rolling should be a huge part of your risk management strategy, especially if you’re trading any long options. Rolling opens the door to being in trades longer without having to commit to buying a significant amount of time. In our classes we teach how to roll long options, verticals and other combination spread strategies. Managing your winners with rolling can be a powerful addition to your trading toolbox.