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The Jellyroll Options Trading Strategy

Filed Under Advanced Options Trading 

The Jellyroll
When we want to buy a calendar (time) call spread or to buy a calendar put spread, we look for which once is the least expensive. If we are buying the June-May $25 call spread, it is the same thing as buying the June-May $25 put spread adjusted for interest and dividend. To figure out what the call spread value is, we need to consider the effects of interest and dividend. To do that, we need to subtract the interest less the dividends.
 
For example, if the May-June $25 call spread is trading for $1.30 and the put spread is trading for $1.25 we would need to find out the interest and the dividends if applicable. If the interest between May and June is 10 cents and there are no dividends to be paid out, the call should be trading at $1.35. Why? Because the call spread should be trading higher than the put spread by the amount of interest minus dividend. In this case, the call spread is selling for 5 cents less than it should. This, the call is under valued.
 
As a general rule, we want to buy the cheapest spread and sell the more expensive one. What if we’re already in the long time spread; we bought the call spread because it was a better value than the put spread. Now, we’re looking to get out and we’re noticing that the put spread is effectively priced higher. Now that it’s time to sell, it’s the put spread that’s more expensive. We want to sell the more expensive one. It makes perfect sense. When you do that- buying the call spread and then getting out by selling the put spread or buying the put spread and getting out selling the call spread- you’ve set up an arbitrage called a “jelly roll”.
 
According to Ron Ianieri, co-founder of the Options University, the jelly roll is to the time spread in the same way “the box” is to the vertical spread. Remember, the box helps us to mathematically relate two corresponding vertical spreads to each other. The jelly roll does the exact same thing for time spreads.
 
The jelly roll is two corresponding time spreads in combination; one long, one short the call time spread, short the put time spread. We can do this because the call time spread and its corresponding put time spread are the same thing. Because they are the same thing, we can buy one and sell the other. To understand how the jelly roll works, we need to polish our understanding of its synthetics.
 
Let’s say we bought the July $50 call and we short the May $50 call and we can say that’s the same thing as buying the July $50 put and selling the May $50 put. When it was time to get out, we noticed that the put spread was still priced higher. So, we sold the put spread against our long call time spread. What is left is long the call time spread and short the put time spread. The long call time spread is the same thing as the long put time spread. Buying the long call is the same as buying the long put so selling the put is the same as selling the call. Or, buying the call and selling the put works the same way.
 
Herein lies the secret:
Instead of looking at it horizontally, let’s look at it vertically. Going back to our synthetics, what is short May $50 call, long May $50 put? Indeed, that’s a short stock position. That is synthetic short stock. We’re synthetically short stock in May. What is Long July $50 call, short July $50 put? That’s synthetic long stock. What do we have here? We have a synthetically long stock. Do you see it?
 
What is a same strike short stock and a long stock? Nothing. No position. Zero. It becomes a straight arbitrage; we bought stock and we sold stock at the same time and captured the difference between months.
 
For more on all things about stock options including basic through advanced online courses, mentoring and trade shadowing, go to the Options University website at: www.optionsuniversity.com

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