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Rolling-up Options Trading Strategy

Filed Under Advanced Options Trading 

Rolling-up
 
What happens if your timing is off and the stock replacement strategy you established looks to expire before the move you anticipated has been completed? Do you have to bail out of the position? The answer is no; you can roll it.
 
When an option trader wants to maintain a position into a new option period, they can “roll up” the call by selling it and buying the next strike up (if the stock is moving up). Of course, you will be selling a more expensive call and buying a cheaper call. This will create a credit. That credit is actually taking part of the profit you may have made up to that point. This is very different from selling a stock.
 
When you take some profit from your stock position, you lose some of the position. You must sell the stock.  In the case of rolling, you keep a bit of your profit and maintain the same position. Rolling-up allows the option trader to extend the same position and take some profits at the same time.
 
Morphing
In their Options Mastery Course offered by the Options University, the many ways that an option trader can close out of a trade are explained. For example, if you have established a vertical spread and are considering how best to close out a call spread, you find there are three possible outcomes.
 
First, the spread can finish out-of-the-money and become valueless. For a call spread, this scenario occurs when the stock closes at or above the strikes of the spread. In order to close out the spread, an option trader would just let it expire. Both options finish out of the money so there is no residual position left over. Say goodbye the premiums you paid to get into the position.
 
Now, if the spread finishes in-the-money, meaning both options are in-the-money, both options are exercised. You will exercise your long call and your short call will be assigned. They cancel each other out leaving you with no residual position. This scenario occurs when the stock price closes lower than the lower strike call involved in the spread.
 
The last scenario is a bit problematic; what happens if a stock closes between the two strikes of the spread? This creates a situation where one strike winds up being in-the-money while the other ends up out-of-the-money. We know that when both options expire in-the-money, they are both exercised. One creates a long stock option, the other a short position canceling each other out. But in the case of a closing price between both strikes, it’s different. The option that is in-the-money leaves a residual stock position. Since the other option is out-of-the-money, it cannot offset the residual stock position created by the expiring in-the-money option.
 
In this situation, there are two actions possible. One is to trade out of the spread on expiration Friday just before the close. Because of the bid/ask spread of the two options, you will probably have to give away some of your profits in order to close out the position. This may be the best thing to do in order to avoid being caught “naked”. If you only trade out of the in-the-money option, you run the risk that the stock moves adversely and the out-of-the-money option suddenly becomes in-the-money.
 

For more on all things about stock options, go to www.optionsuniversity.com

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