Rolling is one of the most common ways to adjust an option position. To roll a trade, we simultaneously close our existing position and open a new one.
It’s possible to roll either a long or short option positions. When we roll a short position, we’re buying to close an existing position and selling to open a new one. We’re adjusting the strike prices on the options, and / or “rolling” the expiration further out in time.
A roll can be done using the same strike price for the new one as the old one, or a new strike can be set. If the new contract has a higher strike price than the initial contract, the strategy is called a “roll up,” but if the new contract has a lower strike price, it is called a “roll down.” These strategies may be used to protect profits or hedge against losses.
But rolling is never guaranteed to work. In fact, we might end up compounding our losses.
Fortunately, backtesting rolling strategies can be easily accomplished using OptionStack.