What does rolling options mean?

[Sam Button]

[Justin Freeman]

The phrase rolling options relates to the expiration date of the contract. Options give their holder, the opportunity but not the obligation, to take a position in an underlying instrument. This position will be taken at a previously agreed price (the Strike price) and has to occur at, or by, a specific time (the Expiration date). It’s worth noting Options that are known as ‘’European’ can only be converted on the actual expiry date but ‘American’ options can be converted into the underlier at any time prior to (and including) the expiry date. If you are for example holding (American style) Call options in the UK Index with an Expiration Date of 20^th Sep 2019 then they can be converted into the underlying instrument (UK Index) at the agreed Strike price, at any time prior to 20^th Sep 2019. If your trading strategy involves holding these Index options as a hedge of another instrument then that raises questions if by early September you decide you want to run the other instrument to the end of the year instead of closing it out by mid-September. Fortunately, the options market allows you to ‘roll’ the options and therefore take any change in circumstance in your stride. Rolling involves simultaneously exiting the first position and taking a new position which has a later expiration date. In the event that you are carrying out a text-book roll then the Strike price and Instrument will remain the same. There is of course an ability to reconsider these two variables. Choosing a different strike price might allow you to adjust the balance between realized and unrealized profit on the position. If the new position has a higher strike price this is called a ‘Roll up’ and a lower strike price is a ‘Roll down’. It’s probably less likely to be the case you are adjusting the Index you are taking Options in. Whilst not technically a ‘Roll’ it’s worth keeping in mind because situations do change, and you might want to improve the level to which you consider your hedge to be ‘appropriate’. In our example, rolling out of September UK Index options and into December Germany/DAX options would result in you taking a hedging position in an index based more around manufacturing rather than services and commodities.