Here and there in this blog I’ve made references to “rolling”, but we’ve never really sat down and defined what this term means or why it matters to options traders.

Rolling can help you dodge assignment

Rolling is a way of trying to put off assignment (or avoid it altogether). It’s a time-grabbing play, essentially, but it’s not one to enter into lightly. Rolling can get you the extra time you need to prove out your opinions, but it can also compound your losses.

You can roll short or a long position, but for the purposes of this discussion we’ll focus on the short side. Over the next few weeks I’ll take you through two different examples: today, rolling a covered-call position, and next week a cash-secured put. We’ll wrap up the series after that with a few final caveats to help make your roll a success.

Our first example: rolling a covered call

Let’s imagine you’ve sold a covered call according to the following terms:

Stock XYZ at 87.50
Sold 1 30-day 90 Call at 1.30
XYZ moves against you to 92

When we put on this trade, the goal was for the stock to reach 90 and be called away, but now our view has changed and we’d like to avoid being assigned. Since the stock is now in-the-money (ITM), at expiration we will most likely be assigned. (To learn more about exercise and assignment, check out my blog series on the subject, which begins here.)  Let’s assume you see some more upside in the stock going forward. If only you could buy yourself a little more time, maybe you could prove your assumptions correct and eek out a little more profit on the stock.

Rolling is one way to respond to this situation. Specifically, we’re looking at two choices to dodge that potential assignment: you can buy back and close the 90 call you sold, taking a loss on the call, but leaving you long stock with unlimited upside going forward. The other option is to roll the short call roll “up” in strike and “out” in time. To do this we will enter one trade in the TradeKing spread trading page and that will be to buy to close the short call and the sell to open a new call. The new option will have a higher strike price and go further out in time.  Moving up in strike will lower the premium received for a short call, but going out in a time will increase the premium. The net effect, we hope, will be a credit to the account for the entire trade. (Check out the example in bold below.)

If you buy back the 90 call, that’ll cost you $2.10 – resulting in a net loss of $0.80 on the trade ($1.30 - $2.10). If you “roll up and out”, you can help offset the cost of buying back the call by choosing a strike price that’s higher (“up”) and further “out” in time.

If you decide to roll, you’d head over to TradeKing’s spread order screen and enter a trade with two parts:

Buy to close the front-month 90 call                                     -2.10
Sell to open a 95 call that’s 60 days from expiration          +2.30
= 0.20 net credit for the roll

Good news and bad news

Rolling helped you secure a $0.20 net credit to add to your initial premium received for selling the covered call (1.30). If all goes well, your 95 call will expire worthless in 60 days, and you’ll keep 1.50 in net credit.

That’s the good news, but keep the potential bad news in mind, too. Every time you roll, you may be taking a loss (2.10 – 1.30 = .80 in this example) on the front-month call. You’re also tacking on even more time to your trade, in which your stock turned course and headed lower. If the stock loses more value than the net credit received for the roll, in the big picture you’d be down for the whole trade.

Rolling can be useful, but you should definitely go in with your eyes wide open.

Next week I’ll run through rolling from the puts side, showing you how to roll a cash-secured put (and the pluses and minuses inherent to that move). Stay tuned!

Regards,
Brian (OG)

[image: green_acres_bowling by ercwttmn on flickr]

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options.

While implied volatility represents the consensus of the marketplace as to the future level of stock price volatility or probability of reaching a specific price point there is no guarantee that this forecast will be correct.

Any strategies discussed or securities mentioned, are strictly for illustrative and educational purposes only and are not to be construed as an endorsement, recommendation, or solicitation to buy or sell securities.

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Good stuff. 

Can't wait for the blog on rolling cash-secured puts. Would have saved me a lot of money earlier this month.

Hello Ivan,

Thanks for reading. Working on the puts one as we chat.

Regards,
Brian (Og)

I have a question.

In this example, you decided to roll the call when the stock is 92, which would make the call ITM. But lets assume that we don't want to risk getting assigned early, we could roll it before the stock ever hits 90.

Could you do an example of how this trade would work. Also what are the pros and cons of rolling early(before the stock hits the strike price). Thanks. 

I believe Brian touched on a 'pre-emptive roll' briefly in the Options Playbook, though no example was given.  Two things I would watch for when doing a pre-emptive roll are

1:  timing of the roll in relation to the expiration of the front-month contract

2:  net debit/credit on the trade when planning your roll

Timing is important since your front-month contract is losing time value, but may be picking up intrinsic value in the process.  The stock may also make a sudden move upward, which may cause the IV to spike, thus increasing the option price.  This leads to the second point on when you perform the roll, are you going to eek out a small net credit or pay out the wazoo to close your front-month contract.  I don't know if Brian agrees with these numbers, but I would try a pre-emptive roll if the stock is within 1-2% of your call's strike price.  Increase the percentages if there is a high IV.

Hello K-Man and Ivan,

Yes, it definitely makes since to do the roll before the stock reaches the strike, many just are not that prepared. I choose an example of a cover call option that is already in-the-money (ITM), because most of the questions I receive are phased "options guy - my covered call option is now in-the-money is there something I can do?" It is much more important on the timing of "the roll" on situations when the stock is ITM. K-man is correct, in that, if the stock gets too deep ITM to roll "up and out" could be very costly. Our main goal is to not have to pay a debit to roll the position. So I would say don't let the stock get 2% to 3% ITM compared to the strike. If the stock has not reached the strike yet not as big of a deal, most of the time it will be possible to roll for credit. So in the blog post example above notice with the stock at 92 the means it is 2 points ITM or about 2% ITM. Next is the timing. The closer to expiration of the front month on both the "pre-emptive" roll or the ITM roll the better it is. This is only because the front month option will usually decay at a more accelerated rate then any of the back month options, which ultimately means more credit to you. This is a double edged sword though, you want the time decay, but if the stock runs the increase ITM amount is much more harmful to the position then the benefit of being close to the expiration date of the front month.

Regards,
Brian (Og)