Advanced stock options trading strategies for success
Rolling up is when you close an existing options position and simultaneously open up a similar position, but using options with a higher strike price. You are effectively rolling the option up to a higher strike price, hence the term. You can do this with a long or a short position, and the process is really quite simply.
You would use the sell to close order to close your position if you were long on options, or you would use the buy to close order if you were short on them. At the same time, you open a new position, using either the buy to open order for the long position or the sell to open order for the short position, on contracts on the same underlying security but with a higher strike price. The process is exactly the same whether it involves calls or puts, but the effect is different. When rolling up calls you will be swapping your existing position for one involving cheaper contracts.
The higher the strike price of calls the cheaper they are. If you are rolling up puts, then you will be swapping your existing position for one involving more expensive contracts, because the higher the strike price of puts, the more expensive they are.
Of course, the effect also depends on whether you are long or short. Rolling up a long call position means a net cash gain, because you will be selling one position and entering a cheaper one. However, if you are rolling up a short call position, then you will have to pay more for the contracts you are buying back than you will receive for writing the new contracts at the higher strike price. On other hand, rolling up a long put position means selling the cheaper contracts that make up your existing position and buying more expensive ones.
Whereas rolling up a short put position means closing your position by buying back the cheaper contracts and then writing more expensive ones.
It's not very often that you would roll up when long on puts though. The technique of rolling up is used for a number of different reasons. It depends on what your existing position is and what the circumstances are. For example, you would typically use the technique when short on calls to prevent assignment of the contracts you have been written. To prevent the calls you had written from being assigned, forcing you to sell your stock, you could roll up the contracts to a higher strike price that was out of the money.
If you were long on calls, you might choose to roll up to a higher strike price if the underlying security had risen significantly and your calls had become deep in the money. By doing this you can take the profit from the existing position, but continue to speculate on further rises without risking all the profit you had made so far.
If you were long on puts expecting a security to fall in value, but that security actually went up in value, you might use this method to cut your losses but still speculate on the security falling back down in value. By selling your out of the money puts, you could recover any extrinsic value left in them and then effectively reinvest in puts with a higher strike price — meaning your position would be nearer the money and you would stand to gain more if the price of the security did fall from that point.
It's worth noting that there is risk involved with this technique, particularly in a volatile market or one that is moving quickly in one direction. If the price of options contracts is fluctuating significantly, then the change in prices between closing one position and entering another could have a major impact. If there is a time delay between two related orders being filled, and that during that time delay prices change, this is known as slippage.
Slippage is a problem that options traders can face whenever they are placing multiple orders that are related to one overall position. Most of the best online brokers offer a solution to this particular problem; they provide a specific roll up order, which basically is one order that simultaneously closes the existing position and opens up the new one with the higher strike price.
Most options trading strategies involve the use of spreads consisting of multiple positions, so you may experience a time when you need to roll up more than position at a time. If you want to roll up an entire options spread, then this can involve several transactions and can be somewhat complex. Because of this, the roll up of options spreads isn't really something that beginner options traders should be considering.
This technique is very much like to the rolling up technique, but effectively the opposite. Instead of moving one position to a similar one with a higher strike price, it involves moving to one with a lower strike price.
You still need to exit the existing position, and then you must enter the corresponding position using contracts that have a lower strike price. Again, it can be applied to both short and long positions, and to both calls and puts. The top online brokers will also typically offer a roll down order, which effectively combines the two required orders into one.
There are three main reasons for using this technique, which would depend on what position you currently have and what the circumstances are. These three reasons are as follows:. To prevent assignment on a short put position. It can be used to avoid assignment if you have written puts that have moved into the money and you want to avoid the obligation of having to buy them. Trading options is an increasingly popular form of investment that is accessible to anyone and does not require a huge amount of starting capital.
If you are prepared to put some time and effort into learning how to trade well then you can potentially make significant sums of money. On this site you will find a wealth of information to help you do exactly that.
You also find recommendations for the best online brokers, in a number of different categories. If you are simply looking for a reputable broker to use right now, then we suggest choosing one from the table below. These are all quality brokers which come highly recommended, based on both personal experience and extensive research.
To find out more about everything this site has to offer, please read on. You will notice that we provide reviews on our top ranked brokers. These are very useful when it comes to choosing who to use, as they contain all the details you need to make an informed decision. You can see a full list of all the reviews we provide here. This site comprehensively covers everything you need to know about options trading, ranging from the fundamental basics right up to advanced strategies.
If you are a complete beginner you will find all the information you need to get started, explained in a way that is easy to understand. If you are a more experienced trader looking to expand your knowledge then you will find plenty of advanced subject matter that will help you to improve your trading skills.
It is possible for anyone to get involved with this, but there is a lot to learn on the subject. To make it easy for you to find exactly what you are looking for we have divided the site into several clearly defined sections. These are as follows. Beginners should start with the first section and then work through each section in order, while those of you looking for specific information will probably prefer to skip straight to the relevant area.
If you would like to know more about what these sections are all about, you can find details on each of them further down the page. There are also a few other articles which you may be interested in.
We have written a page explaining in full what this site is all about, and introducing the people behind it. We have compiled a useful glossary of terms too, which is a comprehensive list of the jargon and technical words used. For those of you interested in such things, we have also written a complete history of options.
This details how the market evolved over time to create the thriving industry which exists today. This introduction has been compiled specifically with the beginner in mind. If you are completely new to all of this, or investment in general, then this section is the best place for you to start.
We have included detailed articles to explain exactly what a contract is, and what it is is all about. We have explained the benefits and the risks involved, where you can buy and sell contracts and how the contracts work in practice.
Finally, we have provided detailed explanations of the key terms and phrases that you will come across — such as moneyness, leverage, margin and time decay.