Roll Forward

What Does It Mean To Roll Forward in Options Trading?

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Roll Forward - Definition

To Roll Forward an options contract is to close off the existing options contract and then put on the same number of contracts of the same strike price and underlying at a further expiration month.

Roll Forward - Introduction

Rolling Forward, also known as Roll Over, an options contract is one of four things an options trader can do when their options contract is at or near expiration. The other three actions being to Exercise the option, close it off or simply let it expire out of the money. To roll forward an options contract is simply to push the expiration date of your existing positions to a later date. This is useful when your short term options trade turns out to be profitable for longer than you expect it to and you would like to be invested longer. In fact, most online options brokers would have "Roll Forward" or "Roll" as a trading choice by itself in your trading interface. This tutorial shall explore what happens when you roll forward an options contract and the various ways in which to do so.

What Is Roll Forward In Options Trading?

One of the most important options basics all options traders must know is that all options contracts have expiration dates. As derivative trading instruments, options do not last forever and once its past its expiration date, it will resolve according to its terms and conditions and then cease to exist. So, what if you bought an options contract which is profiting and you think will continue to do well past its expiration date? This is when you could roll forward or roll over or simply "roll" those contracts to a later expiration date.

Roll Forward Example : Assuming you bought 1 contract of AAPL's August $200 Call Options when AAPL was trading at $200. Upon expiration, AAPL is trading at $250 and you think AAPL will continue to do well, taking those $200 strike price call options further in the money for more profits. In order to stay invested, you roll forward your AAPL August $200 Call options to September by closing off your August $200 Call Options and then buy to open 1 contract of AAPL September $200 Call Options.

Ways To Roll Forward an Options Contract

There are two ways to roll forward an options contract; By Legging or Simultaneous Order.

Legging means performing the closing off of the existing position and the opening of the new further month position seperately as two seperate orders. You could either close off the existing position first before opening the new position or open the new position first before closing the existing position depending on which action gives you the most advantage. Learn more about Legging.

Simultaneous order means executing the closing off of the existing position and the opening of the new further month position simultaneously as one order. Most online options trading interface has such a function and is conveniently named as "Roll". This will allow you to put in both orders simultaneously for execution by the broker. The advantage of using simultaneous order is that there is little to no slippage between the two orders.

Example of Rolling Forward QQQQ Options Using Simultaneous Order

In options trading, You usually roll forward an options contract to a further expiration month at the same strike price. Rolling forward to a further expiration month at a different strike price is known as to also "Roll Up" or "Roll Down" the options position.

Roll Forward and Roll Up Example : Assuming you bought 1 contract of AAPL's August $200 Call Options when AAPL was trading at $200. Upon expiration, AAPL is trading at $250 and you think AAPL will continue to do well. In order to stay invested, maximise leverage and lower the cost of the position, you choose not only to roll forward your AAPL August $200 Call options to September but also roll up its strike price by closing off your August $200 Call Options and then buy to open 1 contract of AAPL's at the money September $250 Call Options.

Orders To Use When Rolling Forward an Options Contract

When rolling forward a short options position, you need to BUY TO CLOSE the existing position and then SELL TO OPEN the new positions. When rolling forward a long options position, you need to SELL TO CLOSE the existing position and then BUY TO OPEN the new position.

If you are using simultaneous order system through your online options trading broker interface, you could specify if you want to be filled at market price, set a Limit price for the net debit or credit or to be filled "Even", meaning to close the old position and open the new position at the same price. Filling at Even is possible when you are also rolling up or down to an option of a different strike price and close in premium to the ones being closed. In heavily traded options contracts, market order should be sufficient to ensure minimal slippage and not missing the whole position altogether due to not getting your limit price or not getting even.

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