What Is a Roll Back?

What Is a Roll Back?

Let me explain what a roll back is in options trading. A roll back, or roll backward, is a strategy where you replace an existing derivatives position with a new one that has a nearer expiration date. Usually, you keep other details the same, like the strike price. For example, you might switch a September at-the-money call to a June one with the same strike.

You use this to cut down on market risk and volatility, whether short-term or long-term. These option roll strategies, sometimes called jelly rolls, come in forms like roll back, roll forward, roll up, and roll down.

Key Takeaways

Here's what you need to know: A roll back means exiting your current derivatives position and replacing it with a similar one but with a closer maturity date. You can do this with calls or puts to boost long or short gamma in your options position. Other strategies include roll forward, up, and down, and roll backs help reduce risk, cap losses, and cut transaction costs.

How a Roll Back Works

A roll back is one of several options strategies labeled as rolls, and it's also called a roll backward. You roll from one options position to another with a nearer expiration date. The new contract must have a closer expiration month, but things like strike price can stay the same or change.

Most roll backs involve all puts or all calls, though you could switch types. To do it, you sell your current options contract on the open market to close the position, then use the proceeds to buy into the new, shorter-term one.

You use a roll back to increase long or short gamma exposure. Gamma measures how an option's delta changes with the underlying price. If you think the underlying will be volatile soon, increase long gamma; if you expect stability, go for short gamma.

Fast Fact

Remember, gamma is the rate of change between an option's delta and the underlying asset's price, where delta is how the option's price changes with a $1 move in the underlying.

Call Roll Back

With calls, you use a roll back to adapt to market changes or fix unprofitable positions. If you roll back to a higher strike, it's a roll up or roll back and up. To a lower strike, it's a roll down or roll back and down. Same strike? Just a plain roll back focused on the expiration.

Put Roll Back

For puts, a roll back moves one put to another with a closer expiration. You sell the old one and buy a new put with a strike that's higher, lower, or the same. Changing the strike adds a roll up or down. You do this if you believe the near-term contract will be more profitable.

Example of a Roll Back

Let me give you examples for both calls and puts. A call lets you buy a security by a date at a set price, while a put lets you sell it.

Suppose you have an October 50 call and want to roll back. You swap it for a September 50 call, maybe because the October one isn't worth it anymore and September looks better. If bearish, you might roll back and down to a September 45.

For a put, say you have a September 50 and sell it to buy an August 50 with the proceeds, betting on the shorter term.

Advantages and Disadvantages of Roll Backs

Options like these hedge against risk and volatility, and rolling back helps you reduce market risk that could wipe out your investment. It lets you limit losses and lock in profits by agreeing on a fixed price for the underlying by a set date. Plus, you save on costs since options require less upfront than buying the security, and commissions might be lower for swaps.

On the downside, options trading demands experience—you must understand risks and potential losses, so it's not for beginners. Your broker will check if you're qualified. Speculation is key, and if wrong, you could amplify losses chasing profits. You might need a margin account with minimums, adding interest, fees, and higher investment amounts.

Other Option Roll Strategies

You have various strategies to exit or enter options, like roll backs, where you close one contract and open another in the same class with an earlier expiration. These help lock profits, limit losses, and cut risk, especially if the old contract is out of the money.

Other strategies include: Option roll up, moving to a higher strike on the same security; option roll down, to a lower strike; roll forward, the opposite of roll back, extending to a longer expiration for position extension.

Roll Back FAQs

Can you buy back an option you sold? Generally no, but you can close your short position by buying a similar call with the same strike and expiry.

Does rolling options count as a day trade? Options can count as day trades, but they're often seen as single trades since they're in one contract.

What does it mean to roll out of an option? It means closing and opening a position simultaneously; for roll backs, you exit a long-term expiration for a shorter one.