Rolling Options
The act of closing an open option position while simultaneously opening a new, mostly similar, option position via a spread.
Reasons for Rolling Options
There are two main reasons you might want to roll options.
One, your current position is nearing expiration and you would like to keep the position on without worrying about time decay or having your position exercised and taken away.
A second reason is that you would like to reduce your net delta, and book a bit of profit at the same time.
There is a third, but it is not a strategy that I would ever suggest, and that is to take a losing trade and extend it further out in time in the hopes that it will eventually recover.
So let's go over one and two.
Nearing Expiration Roll (Calendar Spread)
Time decay is the enemy of an option. When the expiration date gets to be around twenty days away, time decay accelerates as a percentage of the option's value. If you have a position on that you'd like to keep, it can pay to roll out to an expiration date further away.
This sort of roll is called a Calendar Spread. In the example below you can see that we are rolling out of October and into November options. The October options have 12 days remaining until expiration, while the November options have 33 days.
You can see here that the theta on the October call is -1.835 on the .43 cent option. That represents a 4.3% loss per day due solely to time decay (theta), assuming all other inputs remain equal.
The theta on the November call is -1.088 on a .66 cent option, representing a 1.6% daily loss due to time decay.
So, while you are paying a net debit of .23 cents in order to extend your time until expiration by 21 days, you are also slowing the rate of decline (theta) of those options.
Profit Taking Roll (Vertical Call Spread)
Now let's take a look at rolling options in order to book some profit. Sometimes your trade will just run your way and keep going. When it does this it does a couple of things. One, it earns you a bunch of "paper profits." Two, your position's delta increases as the trade moves further in the money.
In the example below you bought the Dec16 $200 calls a week earlier when the price of the stock was hovering near $200. Since that time the stock has rallied to $228, which is great. Your options have gone from $20.00 when you bought them, to $38.00 now. In addition, the delta has increased from .50 to .74, so that now a $1 change in Tesla stock causes a $74 change in your option's value (note that as a percentage basis this is actually not all that much different).
It is worth pointing out that on a percentage basis, there isn't a huge difference based on doing this. A delta of .74 on a $38 option means a 1.9% change per dollar, while a .53 delta on a $19.40 option means a 2.7% change per dollar. You are actually increasing your risk and reward on a percentage basis, though lowering it on a dollar basis.
Perhaps the stock is running into resistance at this level, and you feel like the rally is running out of steam. You want to book some profit, but you don't want to completely close the position, either. In this case rolling up your strike could be a good choice. What you'll do is sell your Dec16 $200 call, and buy the at-the-money $230 call. This is called a vertical call spread. If you do this on a 1:1 basis it will do two things. One, it will book a significant $18.00 profit on your original position while re-establishing a long position. And two, it will lower your delta from .74 to .53.
Conclusion
Rolling options can be a good choice when you want to stay in a position, but aren't comfortable with your current risk profile. Whether it is extending time until expiration to avoid the worst of theta, or simply rolling to a new strike in order to book profit and lower your delta, these are easy to accomplish trades that can help you to re-establish the position you want.
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