You put a lot of thought into an options trade. Everything on your checklist is crossed off, and you’re confident the underlying will move in a particular direction. But then, things don’t go as you thought they would. You could close out your position or reduce your exposure to lessen the blow. But another alternative could be rolling your options position. 

Why would you roll an option? Perhaps you think buying more time will help generate a potential profit; maybe you want to avoid getting assigned; or perhaps the outlook of the underlying has changed and you want to try take advantage of it. Whatever the reason, rolling an options strategy means you’re adjusting your position to a further expiration and/or to a different strike price.  

How to Roll Options 

As an example, let’s look at rolling covered calls.

Suppose you’re a covered call trader selling calls against long stock positions. But as expiration gets closer and the underlying is relatively flat, you worry that you might get assigned. Instead of waiting until expiration to find out, you might roll the short calls from one month to the next and choose a different strike price. By rolling a covered call, you’ll be closing out one position and opening another call contract. 

You’re generally going to roll for two reasons. First, if the short call is in the money (ITM), rolling the option could mean your stock may not be called away (although there’s always some risk of it being called away or assigned). Second, regardless of whether your option is set to expire ITM or out of the money (OTM), rolling the option allows you to replace a position with little or no time value with an option that has time value. Typically, the more time value an option has, the greater the profit potential in your covered call position.

Of course, there’s more to it. You still don’t know with certainty how the underlying stock will perform over the next month. How soon should you start trying to roll? Which expiration date should you choose? Should you roll up (higher strike price) or down (lower strike price)? At what point might you switch from a limit order to a market order and wrap up the transaction?

That’s a long list of questions to deal with, especially in the midst of uncertainty. And that’s just for one stock. Think about the workload if that checklist applied to several options trades. Fortunately, there are tools that can take on some of the burden.

Introducing Strategy Roller

The thinkorswim platform Strategy Roller takes out some of the guesswork for when and how to roll options positions. It automatically generates orders to roll any covered call position from one expiration to another based on the conditions and preferences you’ve selected.

For instance, let’s say you’re long 100 shares of stock and short one call option. Selling a call option against your stock position each month allows you to potentially collect the options premium as income (minus any transaction fees). But this means that as you get closer to options expiration, you have to think about rolling your option in order to maintain your covered call position.

On thinkorswim, select the Monitor tab, then Strategy Roller. Under Eligible Positions, select the covered call you want to consider rolling and then edit the strategy settings (see figure 1).

STEP 1: SET BY STRIKE OR DELTA? First, set the strike price to which you’ll roll an existing options position. You might first want to indicate in Strategy Roller how many strikes away from the money you want the new option to be. For example, a value of “0” would mean the platform would automatically use the at-the-money (ATM) strike. A positive value selects an out-of-the-money strike, and a negative value selects an in-the-money strike. Setting a value of “2” would select an option that’s two strikes out of the money, while a value of -1 selects an option one strike in the money.

Alternatively, you could select a strike based on the options delta. A delta of 50 indicates an ATM option; a delta higher than 50 equates to an ITM option; a delta below 50 gives you an OTM option.

STEP 2: PICK YOUR EXPIRATION. Once you decide on your roll strike, pick your target expiration. Choosing a shorter-term expiration allows you to potentially collect premiums with greater frequency but may incur frequent trading costs as well. On the other hand, although a longer-term expiration may delay your potential credit, premiums could be larger thanks to the increased time value in longer-term options.

Within the tool, the default setting reads “ 1 EXP,” which means you want to roll to the next standard expiration. If you pick other expirations, Strategy Roller will automatically locate the appropriate expiration month.

STEP 3: CHOOSE YOUR PRICE AND TIME. Every Strategy Roller trade begins as a limit order that defaults to the midpoint price. You can decide how many days prior to expiration you want to start to roll your covered call.

If you were to roll your options position manually, you’d probably act with more urgency the closer you got to expiration. Strategy Roller mimics this tendency by pricing your limit order more aggressively as expiration approaches.

The Good News? It’s Automatic

Because Strategy Roller allows you to set the initial conditions for each roll transaction, you not only reduce the time spent each month thinking about how to roll (and how to roll multiple positions), but you also save yourself the trouble of making all your rolling decisions at once under pressure.

With well-executed moves, you also potentially avoid some of the costs associated with a failure to roll. Those can include losing out on a potential periodic income stream, having your stock called away, or possibly enduring some unanticipated tax consequences that may come from the premature sale of your stock. Keep in mind that rolling options strategies can entail additional transaction costs, which could impact your potential return.

Market conditions are always changing, and your open positions are likely to react to those changes. If you’re comfortable trading options, rolling covered calls can be a great start to making adjustments to your open positions. Keep in mind, there are different ways to roll options that can be applied to different options strategies. Although rolling doesn’t guarantee any outcomes, it’s still something to consider when your positions are getting close to expiration.