How to Roll a Call Option: Step-by-Step Guide

A call option is a financial contract providing the buyer the right, but not the obligation, to purchase an underlying asset at a specified price, known as the strike price, on or before a particular date, the expiration date. This right is acquired by paying a fee called a premium to the option seller. The strategy of “rolling” an option is a common practice among options traders to adjust an existing position without completely closing out of the market.

Understanding Call Option Rolls

Rolling a call option involves a simultaneous two-part transaction designed to manage an existing options position. This process entails closing an open call option position, typically by selling to close a long call or buying to close a short call, while concurrently opening a new call option position on the same underlying asset. The new position usually features a different strike price, a different expiration date, or both, allowing for strategic adjustments.

The financial outcome of a roll is determined by comparing the premium received from closing the old option and the premium paid for opening the new one. If the premium received from closing the existing option exceeds the premium paid for opening the new one, the roll generates a “net credit.” Conversely, if the premium paid for the new option is greater than the premium received for the old one, the roll results in a “net debit.” This net credit or debit is an immediate financial consequence of the adjustment.

Reasons for Rolling Call Options

Traders roll call options to achieve various strategic objectives, adapting their positions to changing market conditions or personal goals. One common motivation is to extend the time horizon of a trade, particularly when an existing option is nearing its expiration date, and the trader wishes to maintain exposure to the underlying asset’s potential movement. This provides additional time for the market to move favorably or for the strategy to unfold as anticipated.

For those who have sold (written) call options, rolling can serve as a mechanism to avoid being assigned the underlying shares if the option moves into the money. By adjusting the strike price and/or expiration, the seller can defer or potentially prevent the obligation to deliver shares at the strike price. Adjusting the strike price is another reason, allowing traders to align their option position with a revised outlook on the underlying asset. This could involve rolling up to a higher strike to capture more upside potential or rolling down to make an out-of-the-money option less likely to expire worthless.

Rolling can also be used to capture additional premium, especially for written call options. By rolling out to a later expiration and/or up to a higher strike, sellers can collect more premium, enhancing the income generated from the position. For purchased calls, rolling can sometimes reduce the overall cost of the position if the roll is executed for a net credit, effectively lowering the breakeven point. This flexibility allows traders to manage risk, extend trade duration, and potentially improve profitability.

Types of Call Option Rolls

Call options can be rolled in several distinct ways, each serving a specific tactical purpose based on the trader’s outlook and the option’s performance.

• Rolling Out: Involves changing only the expiration date to a later one while keeping the strike price of the option contract the same. This strategy is often employed to give a position more time to become profitable or to extend a winning trade.
• Rolling Up: Refers to adjusting only the strike price to a higher one, with the expiration date remaining unchanged. This is typically done when a call option position has become profitable, and the trader wants to lock in some gains while still participating in further upside potential of the underlying asset.
• Rolling Down: Means changing only the strike price to a lower one, while the expiration date stays the same. This might be used defensively to adjust a position that has moved against the trader, potentially making an out-of-the-money option more likely to become profitable.

A combination of these adjustments is also common:

• Rolling Out and Up: Involves moving to a later expiration date and a higher strike price, often done to take profits on a short call and reposition for continued upward movement in the underlying.
• Rolling Out and Down: Combines a later expiration with a lower strike, which might be used to defend a position that has moved unfavorably, providing more time and a more accessible strike price.

Preparing to Roll a Call Option

Before executing a call option roll, careful preparation and analysis are necessary to ensure the adjustment aligns with the trader’s objectives.

Market Conditions and Strategy

Analyzing current market conditions is an important first step, considering factors such as the underlying asset’s price movement and overall market volatility. These elements influence the premiums of both the existing and the new option contracts, impacting the potential net credit or debit of the roll.

Choosing the new strike price and expiration date is a deliberate decision based on the strategic goals for the trade and the market outlook. This involves evaluating how far out in time to roll and whether to adjust the strike price higher, lower, or keep it the same, depending on the anticipated future direction and magnitude of the underlying asset’s movement. Calculating the net debit or credit for the proposed roll is also essential.

Costs and Implications

Considering transactional costs like commissions and potential slippage is also important. Brokerage firms typically charge a per-contract fee for options trades, which can range from approximately $0.00 to $0.65 per contract, and sometimes a flat fee per trade. Slippage, the difference between the expected price and the actual execution price, can occur due to market volatility or low liquidity. Employing limit orders can help mitigate negative slippage.

Understanding margin impact is particularly relevant for those selling options, as margin requirements act as collateral for potential losses and can vary depending on the position. Finally, it is important to recognize the tax implications: rolling an option is generally considered a closing transaction for the old position, realizing any gain or loss, and the new option is treated as a new position for tax purposes.

Executing a Call Option Roll

Executing a call option roll involves a precise sequence of steps, typically facilitated through a brokerage platform.

Using a Roll Order Type

Most online brokers offer a specialized “roll” or “multi-leg” order type that bundles the closing of the existing option and the opening of the new one into a single transaction. This combined order type is designed to streamline the process and often helps to minimize commission costs compared to placing two separate orders.

Inputting Order Details

Within the brokerage interface, the user will input the details of the option contract being closed, specifying whether it is a buy-to-close or sell-to-close order. Simultaneously, the details for the new option contract must be entered, including the desired strike price and expiration date for the buy-to-open or sell-to-open order. It is important to set a limit price for the overall net debit or credit of the roll. A limit order ensures the transaction executes only at the specified net price or a more favorable one, providing control over the financial outcome of the roll and helping to manage potential slippage.

Review and Monitor

Before submitting the order, a thorough review of all details is necessary. This includes verifying the correct underlying asset, strike prices, expiration dates, and the quantity of contracts for both legs of the roll, along with the calculated net debit or credit. After submission, the order enters the market for execution. Traders should monitor the order status, as partial fills can occur, especially in less liquid options. Once the order is filled, it is important to confirm that the old position has been closed and the new position has been opened as intended by checking the brokerage account’s portfolio view or transaction history.