Rolling and writing is a strategy to take and secure profit on an option trade.
“Rolling” an option refers to selling and buying in one order. An option can be
rolled up (to a higher strike price)
down (to a lower strike price)
out (to a later expiration date.
Taking profit by rolling up (or rolling down with puts)
The trader can decide to roll his option position to a higher strike with the same. As a result, she receives a net credit for the transaction, since buying the higher strike options costs less than the what the lower strike is being sold for. See example below.
Securing profit by writing
After rolling, the trader can write a higher strike option against the existing option to absorb any subsequent drawdown from the underlying stock decreasing and also compensating theta decay.
We are going to cover this concept in more detail in a separate article on writing against a long position.
Rolling up example
Entry: On Apr 1 2021, the trader buys the MSFT 230 strike May21’21 call option, filled at $15.60.
Rolling up: On Apr 8 2021, the trader decides to roll up the position to secure profits. He sells the 230 strike call options for $25.30, and at the same time, buys the 240 strike (same expiration, May21'21) call option for -$16.90. The roll gives the trader a credit of $8.4 per contract.
Exit: On Apr 12, 2021, the trader exits the positions, selling the 240 calls for $18.85, adding another $1.95 per contract in profit.
Questions or suggestions?
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