Rolling Options, how this simple strategy can increase your returns

Rolling options is a great way for you to take profits from option contracts you already have and increase your returns.

So what does it mean to roll your options? Well unlike stocks options eventually expire worthless, the third Friday of each month marks the expiration of the options for that month.

But what if you own an option and want to keep the benefits of holding it? That is were rolling options comes in. This is a strategy all brokers will allow you to do, you simply close your position and open the same position in the next month’s option chain.

Here’s an example.

You own stock XYZ which is currently trading at $46. The stock was trending sideways, so you decided to sell the $50 call for $1.50. You make that money up front and now have the obligation to sell the stock if it reaches $1.50 or higher.

Three weeks later the stock continues to move sideways and now is trading at $44. The option contract you sold is trading for $.10, which gives you a profit of $1.40. If we let it go it will expire worthless in 1 week, which means we will make the extra $.10.

You also see that the $50 call option for next month is trading at $1.35. So, instead of waiting for your option to expire and then selling the next months option we can simply roll our options. We buy back our option for $.10 and sell the next months option for $1.35, which gives us more cash flow.

Rolling Vs Waiting

If you try to hold onto the last $.10 it can work against you in two ways.

1. If the stock goes up fast

If the stock goes up above the strike price you would have to sell it for $50. Which means you would have netted a profit of $1.50 plus what you made on the stock, but if you rolled your option out and then the stock went up you would have netted $1.40+$1.35 or $2.75 plus what you made on the stock.

2. If the stock stays the same or goes down

If the stock stays at the same price or goes lower the option will melt away because of time value. So if we waited until our option contract expires to go out and sell the next month’s contract we will probably not be able to sell it at the same price, now the contract might only be worth $.90 which means we missed profits by trying to be greedy on our last trade.

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