how a roll back works
a roll back is one of many options trading strategies available to traders and one of many that is labeled as a roll a roll back may also be called a roll backward this strategy rolls from one options position to a new one with a more near term expiration date the roll back component of the transaction requires that the expiration month be closer than the previous position other aspects of the contract primarily the strike price can change or stay the same most roll backs occur as either all puts or all calls but a trader could potentially switch from one to the other in all types of roll backs the option owner sells their options contract in the open market to close the position then uses the proceeds to roll into the new shorter term position a roll back is used to increase the long or short gamma exposure in an options position where an option s gamma is its sensitivity in its delta to changes in the underlying price a trader would want to increase a long gamma position if they believe the underlying will be quite volatile in the near term while they would prefer to increase a short gamma position if they believe that the underlying price will remain constant and stable gamma is the rate of change between an option s delta and the underlying asset s price the option s delta is the rate of change between its price and a 1 change in the underlying asset s price traders use a roll back to take advantage of changing market conditions or to revise positions that they no longer see as profitable call positions rolled back with higher strike prices are also considered a roll up or a roll back and up 1 call positions rolled back with a lower strike price are considered a roll down or a roll back and down options with the same strike are just considered a roll back and focus only on the expiration date a put roll back will roll one put to another with a closer expiration the trader can use the proceeds from the sale to buy a new put contract with a selling strike price that is higher lower or the same as the previous position changing the strike price would also incorporate a roll up or roll down with a put roll back the investor believes there will be greater profit from the contract in the near term example of a roll backhere are a couple of examples to show how the roll back process works with both a call and a put remember a call gives a trader the right but not the obligation to purchase a security by a specific date at a specific price while a put gives the owner the right but not the obligation to sell the security by a specific date at a specific price let s say a trader has an october 50 call and wants to execute a roll back they do so by swapping it out for a september 50 call this trader may believe that the former october call is no longer worth owning and the september call is a better bet if the investor is bearish on the stock they may do a roll back and down with a september 45 here s how it works with a put let s say this trader purchases the september 50 contract and decides that they d be better off selling this contract for one with a closer expiration date they use the proceeds from the sale of the contract to purchase one at the same position for the month of august advantages and disadvantages of roll backsas mentioned above options contracts are a hedge against risk and volatility traders can take advantage of rolling back on their options contracts in order to reduce market risk which can put the investor s entire investment in jeopardy by cutting back on the risks roll backs also allow traders to cut down on losses and lock in their profits that s because this strategy gives them the option to agree on a fixed price for the underlying security with the other party to be purchased or sold by a specified date traders can also save on transaction costs trading options contracts including the execution of roll backs means the trader puts down a lower cost at the onset of the contract including commissions rather than purchasing the underlying security individually and commissions are generally lower as traders may have to pay one fee to swap out contracts options trading of any kind requires a lot of experience you need to have a good understanding of all the risks involved and the potential for losses that may come your way in short this kind of trading isn t for novice investors as such the firm you work with the one that handles your accounts will need to ensure you are experienced enough to execute these trades and strategies including roll backs speculation plays a big part in options trading traders use a variety of techniques to map out which direction their investments will head toward which means it s never an exact science you do risk boosting your losses as you try to chase profits if your strategy doesn t work out your brokerage or financial firm may want you to set up a margin account in order for you to trade options contracts and there may be a minimum balance requirement in order to set this up this can increase your costs as it can add interest charges account fees not to mention increasing how much you originally intended to invest in the first place reduces market risks and volatilitylimit losses and lock in profitssave on transaction costs and feesyou need to be experienced in order to take advantage of roll back strategiesspeculation can lead to more lossesyou may need to set up a margin account which could increase your costsother option roll strategiestraders have many strategies available to them when they want to exit or enter options contracts roll backs are one of those options these strategies involve exiting one contract and entering a new one in the same class while some details of the contract may or may not change one definite is that the expiration date in the new position is always earlier rolling strategies help option traders to lock in profits limit losses and reduce risk investors typically roll contracts because the contract they seek to close is far out of the money 2using the following roll strategies can help an investor to increase their profit potential and capitalize on market changes roll back faqscan you buy back an option you sold once you sell your option you generally can t buy it back but there is a way to eliminate your short position you can do this by buying a call option with similar details for the same underlying asset including the strike price and expiry date 