Can You Roll Calls? How the Strategy Works

Options contracts allow investors to manage positions and adapt to market shifts. “Rolling” a call option is a method to adjust an existing options trade rather than initiating a new one. This technique modifies the terms of a call option, offering flexibility in dynamic market conditions.

Understanding Call Options and Rolling

A call option is a financial contract that grants the buyer the right, but not the obligation, to purchase an underlying asset, such as a stock, at a predetermined price, known as the strike price, on or before a specified expiration date. The buyer pays a premium for this right. Conversely, the seller of the call option receives this premium and assumes the obligation to sell the underlying asset if the buyer chooses to exercise the option.

Rolling a call option involves simultaneously closing an existing call option position and opening a new one. This process is generally performed to adjust the terms of an options trade without fully exiting the market exposure. The new option contract typically features a different strike price, a different expiration date, or both, depending on the trader’s updated market outlook. This adjustment allows a trader to modify an existing strategy, such as extending the duration of a profitable trade or adjusting a position that is moving unfavorably.

Executing a Call Roll

Executing a call roll involves a multi-step transaction, often facilitated through a single order type on brokerage platforms. The core of this process is a “buy-to-close” order for the existing option and a “sell-to-open” order for the new option, allowing for a seamless transition between positions.

There are several common types of call rolls, each with distinct characteristics. “Rolling Out” involves closing the current option and opening a new one with a later expiration date while keeping the same strike price. This strategy provides more time for the underlying asset to move in the desired direction. “Rolling Up” means moving to a higher strike price with the same expiration date, typically done when the underlying asset’s price has increased significantly.

Conversely, “Rolling Down” entails moving to a lower strike price while maintaining the same expiration date. This might be considered if the underlying asset’s price has declined, allowing for an adjustment to the position. More complex rolls combine these changes: “Rolling Up and Out” involves moving to both a higher strike price and a later expiration date. Similarly, “Rolling Down and Out” means shifting to a lower strike price and a later expiration date.

Financial Considerations of Rolling Calls

The act of rolling a call option directly impacts an account’s financial standing, resulting in either a net credit or a net debit. A net credit occurs when the premium received from selling the new option exceeds the cost of buying back the old option, increasing the cash balance. Conversely, a net debit means the cost of closing the old option and opening the new one is greater than the premium received, leading to a cash outflow.

Rolling can also modify the breakeven price of the overall options strategy. If a roll results in a net credit, it can lower the breakeven point, making the position profitable with less upward movement in the underlying asset. Conversely, a net debit from a roll would raise the breakeven point, requiring a greater price increase in the underlying asset for the position to become profitable. Beyond the premiums, standard trading commissions and fees apply to both the closing and opening legs of a rolled transaction, affecting the overall profitability of the roll.

Tax Reporting for Rolled Calls

Each component of a rolled call option transaction is considered a separate taxable event. When an existing option position is closed, any resulting gain or loss is realized and must be reported on the investor’s tax forms for the tax year in which the transaction occurred.

Capital gains and losses are typically reported on IRS Form 8949 and then summarized on Schedule D of Form 1040. The new option position established through the roll then begins with its own new cost basis and holding period. While brokerage firms often provide consolidated statements, investors are responsible for ensuring that each leg of the roll is accurately recorded. Most call options are held for less than a year, meaning gains or losses from their sale or expiration are classified as short-term capital gains or losses, which are taxed at ordinary income rates.