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When To use a Jellyroll Options Trading Strategy

Filed Under Advanced Options Trading 

When To use a Jellyroll
Options Universtiy goes into detail about complex spreads in its comprehensive Options Mastery course. One of the strategies covered is the complex strategy called the “Jellyroll”. And indeed, it is sweet. This strategy employs the use of calendar spreads-also known as time spreads. When postioned properly, Jellyrolls are going to help option traders choose between whether it is best to use the call spread on or to use the put spread.
 
The best way to digest a jellyroll is to eat one. So, let’s look at an example used in the Options University Mastery course. Let’s say we want to buy the June-July $65 time spread. The stock is trading at $65. So, we buy the July $65 call and we’re selling the June $65 call. The reason we did that was when we looked at the interest and dividend, we said the call spread must be trading higher than the put spread by the amount of interest minus a dividend but there is none in this case so there is no dividend.
 
When we saw there was a difference of interest of 10 cents, we knew the call spread should be trading at the same amount as the put spread except for that 10 cents. It should be trading higher by 10 cents so that means the put spread should be 10 cents lower but the put spread was trading at the same price.
 
As we let time on the front month erode the extrinsic value and widen the spread, we will have accumulated some gains. Volatility for the stock is increasing and we know that if the stock moves in either direction away from the strike we are going to lose money. There is no sense in staying in this thing. We have our profit and we want to get out. We look at the put spread and see that it is still priced the same as our call spread and we know that it should be 10 cents lower because of the interest in the call spread. Because selling the call spread is the same thing as selling the put spread and the put spread is trading effectively higher than the call spread, its best to get out of our long call spread by selling the put spread. What?  Now the jellyroll is getting messy
 
You see, we actually would have two contra synthetic positions: short call, long put, that equals what? Short stock. Also, w are long call, short put which equals what? Long stock. So, in affect, we are short and long stock. Now here’s the value of a jellyroll: it is an arbitrage play on the difference between the interest rates of the two months. If the stock closes below the strike, our short call will be worthless, we’ll be long a put that’s now in-the-money, If this happens, we
exercise our put creating a short stock postion. Come expiration, we will be short real stock, long a call and short a put; we are in a reversal!
 
While we’re in this arbitrage, we’re going to be collecting short interest in our position. Come July expiration, our synthetic long stock position in our reversal will become real long stock and cancel out with the short stock. At July expiration, we’ll have nothing more. In other words, when we come out of that position in June we will be collecting interest for the month of July.
 
In summary, If you’re a buyer, you want to get in the cheaper spread. Likewise, if you’re a seller, you want to sell the more expensive spread and the jelly roll helps us compare the cost of both of those spreads together..
 
For more on all things stock options, go to www.optionsuniversity.com

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