If you are an experienced trader or investor then you have probably used option trading rolling strategies. To put it simply it is a strategy where you would move your strike point to a new strike point within the same month as your original transaction. The term rolling essentially means moving.
In options trading the movement happens when you move from one strike price or point to another strike price or point. This can be accomplished when you move points vertically or horizontally. Moving points vertically means you will be making this transaction within the same month as your original strike point. Moving points horizontally means you will make a request that this transaction takes place within a different month from your original transaction.
Traders and investors understand that in order for them to maximize their returns they need to use the covered call strategy each month consecutively over a long period of time. This option trading strategy requires the investor or trader to move or roll the strike point when the option expires. The term rolling is derived from this type of trading strategy. On the other hand, traders and investors need to make sure their strategy provides them with a means to stop or avoid rolling when it is not in their best interest to continue.
If a trader or investor decides not to roll the strike point then they are allowing their investment to increase or appreciate. This is not a normal strategy to use with option trading but it can be a transaction utilized if the market conditions warrant this type of option trading. In this case when the option is exercised and the share is turned into capital, it could be called away.
In option trading when an option is expiring, the trader or investor can perform one of two types of transactions. They can execute a short option, which refers to being 'out of the money' or 'in the money'. If the option is 'out of the money' then it is essentially worthless. In this case the trader or investor will sell the next month's call after letting the option expire. If the option is 'in the money' then the trader or investor needs to sell the next month's call after buying the short option back in order to keep the stock. Even thought that type of trade is actually two trades, buying and selling, it is considered one trade. This is also known as a spread. To roll out your covered call or buy-write you need to utilize this type of spread so you can buy back the short option and keep your stock.
To maintain your covered call strategy traders would sell their second month option short. The remaining positions are long stock and short calls that traders and investors then buy back at the beginning of each month with no choice on front month options. There are choices to sell near term or with a farther expiration date for the next month option using this type of option trading strategy. However, rolling options can be complicated and best left to experienced traders and investors to avoid unnecessary investment risks.
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