Rolling is defined in options as moving a position from one
strike to another either vertically in the same month,
horizontally to another month or some combination thereof.
Other times, you may have to buy your short call back so that
you will not lose your stock. Sometimes, you may even want to
allow the stock to be called away if you have decided that the
stock has reached a level were you want to take your profits and
begin to look for another opportunity.
The term “roll” means to move your position either out to the
next strike or to move your position up or down a strike in the
same month. The term “roll” means “to move.”
Rolling is normally done via time spread and/or vertical
spreads. Without getting into the trading of spreads, which is a
unique strategy in itself and a topic for future Options
University courses, we will talk a little about the “roll.”
As stated before, the covered call strategy is most effective
when executed month in and month out over an extended period of
In order to do this, an investor must re-initiate the position
every month at the option’s expiration. The re-initiation of the
position every month is where the term rolling comes from.
However, there may be times when you may want to give yourself a
little more upside room for capital appreciation. In those rare
cases, you will not want to “roll” the position, because it
might be called away if the call you sold is exercised when it
becomes ‘in the money.’
When an option’s expiration approaches, your short option can
either be in-the-money or out-of-the-money. As we discuss the
two potential outcomes, let’s first assume that we want to hold
onto our stock.
If the option is going to finish out of the money, you would let
it expire worthless and then sell the next month’s call. If the
option is going to expire in-the-money and you want to keep the
stock you will need to buy the short option back and sell the
next month’s call.
This trade will consist of two option trades. You will be buying
one option and selling another, which is commonly known as a
spread and is referred to as a single trade.
So, when you roll out your covered call or buy-write, you do it
by doing a spread. The front month option, the one that you
happen to be short, will be bought back thus ensuring you keep
The second month option will be sold short thus re-initiating
your covered call strategy. The position that remains is long
stock and short calls. As far as the selection process of the
spread used for the rolling of the position, there will be some
Of course, there is no choice as to the front month option, you
must buy back the option you are short. However, you do have a
choice as to the next month option you are going to sell,
whether it be near term or farther out in expiration.
This goes back to our earlier conversation about lean. If you
are no longer bullish then you would not have bought back your
short call and instead allowed it to be exercised and have the
stock called away from you. If you choose to roll the position
then you must be somewhat bullish on the stock. Your lean will
dictate to you which new option to sell.