What Is a Long Jelly Roll?
Let me explain what a long jelly roll is—it's an options strategy designed to capture profits from arbitrage based on how options are priced. You look for differences between the pricing of a horizontal spread, which you might know as a calendar spread, made up of call options at a specific strike price, and the same setup but with put options instead.
Key Takeaways
- A long jelly roll is an options spread-trading strategy that takes advantage of price differences in horizontal spreads.
- It involves buying a long calendar call spread and selling a short calendar put spread.
- Usually, the two spreads are priced so similarly that there's not enough profit to bother with the trade after costs.
Understanding Long Jelly Rolls
As a trader, you should know that a long jelly roll sets up a complex spread that's neutral and fully hedged against the directional moves in the underlying stock price. This way, you profit purely from the difference in what you pay for those spreads.
This works because horizontal spreads using calls should theoretically price the same as those using puts, except you subtract any dividend payouts and interest costs from the put spread's price. That means the call spread is often a tad higher, depending on if a dividend is coming before expiration.
You build a jelly roll by combining two horizontal spreads. For the long version, you buy the call spread and sell the put spread. The idea is to buy the cheaper one and sell the pricier one, pocketing the difference in theory.
You can tweak this strategy by adding more long positions or changing strike prices, but remember, that introduces extra risks. For you as a retail trader, transaction costs will probably eat up any profit since the price gap is usually just pennies. But keep an eye out—sometimes exceptions pop up for a quick win if you're sharp.
Long Jelly Roll Construction
Here's an example to show you when you'd set up a long jelly roll. Imagine it's January 8, and Amazon (AMZN) is trading around $1,700 per share during regular hours. You see these weekly options for the $1700 strike: Spread 1 is a Jan. 15 short call over a Jan. 22 long call, priced at 9.75. Spread 2 is a Jan. 15 short put over a Jan. 22 long put, priced at 10.75.
If you buy Spread 1 and sell Spread 2 at those prices, you lock in profit. Essentially, you're creating a synthetic long stock position at 9.75 and a synthetic short at 10.75. The long call and short put mimic owning shares, while the short call and long put mimic shorting them.
Net result? It's like entering and exiting the stock at $1,700, with everything canceling out except the spread price difference. If the call spread is a dollar cheaper than the put, you net $1 per share per contract—$1,000 on 10 contracts.
Short Jelly Roll Construction
For the short jelly roll, you reverse it: sell the call horizontal spread and buy the put one. You're hunting for cases where the call spread is priced much lower than the put, not explained by dividends or interest. If that mismatch shows up, the trade becomes attractive for you.
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