Options are forward contracts. This means that the purchase or sale of an option involves the right or obligation to buy or sell an underlying at a fixed time in the future. After the expiration date of the option, the option thus loses its validity. If you want to extend the option, you have the possibility to postpone the expiration date by rolling the option. It is also possible to adjust the strike price of the option during a trade.
Why are options rolled?
When you open an options trade, you usually follow a certain strategy and/or have an expectation regarding the development of the price (and/or the volatility) of the underlying. For example, you might assume that
- the Apple share will rise sharply in the next three months,
- the DAX will not reach a new all-time high within the next four weeks,
- or that the WTI crude oil price will move in a trading range of plus/minus USD 5, relative to the current market price, over the next seven days.
For all these market scenarios are suitable Option strategies such as a long call, a short call, a vertical spread (e.g. a bull put spread or a bear call spread), or an iron condor.
If the price of the underlying moves as you want, you make a profit and can either wait for the options to expire or end the trade early.
If, on the other hand, your trade develops to your disadvantage and a loss is incurred, you can, on the one hand, close the trade and realize a loss; on the other hand, you can roll the trade in order to keep open the possibility that the underlying develops in accordance with your market expectation and a profit is generated.
In this context, rolling means: you end an options trade and immediately open a new trade in the same underlying.
Vertical rolling
Here, the strike of the option is rolled up or down. The maturity date remains the same.
Horizontal rolling
Here, the trade is usually rolled back (i.e. to a later expiration date).
Vertical and horizontal rolling
Here we roll to a later expiration date and to a different strike.
Options roll in the TWS
To roll a trade in the Trader Workstation (TWS), you have the following options:
- You first close the first trade and then open a new trade.
- You create a combination order, which simultaneously ends the first trade and opens a new trade.
- You use the "Option extension" tool
To end an options trade, you can right-click on the trade in the Portfolio tab of TWS and then click "Close" (or "Buy" or "Sell"). You can also use the Option Trader by navigating to the Portfolio tab or, alternatively, open a new "counter-trade" directly in the option chain, which will end the open trade.
When you close a trade in this way, you must open a new trade at the same time or immediately after closing the first trade.
It is somewhat faster if you place a combination order via the Strategy Builder of the Option Trader create. Compared to the first method, this ensures that both trades are executed exactly at the same time. To do this, switch to the Strategy Builder tab in Option Trader and now select the individual legs (i.e. the individual options). For example, if you want to roll a short call to a later expiration date and to a higher strike, you buy back the current short call by clicking "Buy" in the option chain. This will add the option to in the Strategy Builder. Then sell a call option with a higher strike and a later expiration date by clicking "Sell" in the option chain. Now this option will also be added to the Strategy Builder and you can submit the trade.
Rolling Options with the Strategy Builder of the Option Trader in TWS
Besides the methods described above, you can use the option extension tool. To do this, you also right-click on an open option trade and then click on the field > Extensionwhere you can select the individual legs (options).
Frequently asked questions about rolling options
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Option rolling refers to the closing of an option trade and the simultaneous opening of a new option trade on the same underlying, but with a different strike price and/or expiration date.
As a rule, you roll options if the market does not develop as expected, but you still want to hold on to the original idea of the trade. Thus, a profit can still arise from an interim book loss, provided that the underlying develops as expected.
In practice, when rolling an option or an option trade with multiple legs, either a combination order is created where all trades are executed simultaneously, or the individual trades are entered as separate orders. In addition, the "Option extension" tool is available in the TWS.
When rolling options, one should pay particular attention to the time value and the associated time value decay. The following applies: The longer the remaining term of an option, the more expensive it is. If you roll a purchased option backwards (because it has not yet made a profit), the option premium paid increases and so does the maximum possible loss. When rolling sold options, you initially make a profit because of the longer remaining term. However, if the price of the underlying continues to develop to your disadvantage, the maximum possible loss also increases here.
Just as with trades consisting of only one option, you can execute a complex options trade with multiple legs as a combination order, roll it using the "Option extension" tool, or create multiple orders for all legs.