• Trading 101: Rolling Options

    by  • March 15, 2013 7:24 am • Trading 101 with Peter Bryans • 0 Comments

    Regular monthly options for March expire after the market closes today, and many contracts will expire worthless—in other words, they will finish out-of-the-money (OTM) and will have no intrinsic value and zero time value left after trading ends at 4 PM. For those traders/investors that want to hang onto these options for a little longer, many will simply “roll out” their contracts an extra month.

    Rolling out an option is a simple concept, and one that happens quite often. It involves selling the current option and then purchasing them at the same strike, but with a different expiration month. To illustrate, semiconductor company Freescale (FSL) is shown below.  From the chart you can see that there was a close below the $16 level yesterday (3/14/13), and that FSL looks as if it may stay below this level until after March options expire.

    (courtesy of StockCharts.com)

    In my latest blog post on analyzing option open interest, I discussed how overhead calls can act as resistance. From the graph below, that features open interest for FSL March options, there are a large number of calls sitting overhead at the 16-strike.

    What does this mean? Well, if we assume that FSL will not break the $16-level by today, then these contracts will expire worthless, and those who sold the calls will get to keep the full premiums that they collected. Another possibility is that those premium buyers will roll out the options to the next front month—April. It could be worthwhile to see if this plays out, so that as traders we can determine if this same level will act as resistance again in April—or if the stock will simply trade through the $16 mark.

    Here is a quick snapshot of the option prices for the 16-strike calls on FSL (note that prices were after the market closed on 3/14/13). Notice the very modest bid for the March 16-strike calls ($0.05) with one day left until expiration. The April series of calls is featured next. If the option holders decide to “roll out” these options, they would sell (to close) the March 16-strike calls for $0.05 and then buy (to open) the April 16-strike calls at the offer price (ask price) of $0.80. This would result in a net debit of $0.75 ($0.80-$0.05) for each new contract purchased.

    (March–data courtesy of eSignal)

    (April–data courtesy of eSignal)

    Rolling out options can happen for several reasons, and there is really no telling what that exact reason may be. Are the option holders comfortable speculating on higher prices for an extra month? Do these calls represent a hedge from those who shorted the stock? Were these contracts sold (to open) or bought (to open)? The importance lies in maintaining awareness for strikes that have an overwhelming number of calls/puts. From there, good analysis involves digging deeper and determining if you can use this information in your risk assessment.

    About

    Peter Bryans joined the Schaeffer's Investment Research trading team as a Trader in April, 2012. A graduate of the Fisher College of Business at The Ohio State University -- where he concentrated in Finance -- Peter previously held internships with an insurance broker and a wealth-management firm. In his current role, Peter trades a variety of our real-time option services and also hosts our "Options Apprentice" weekly webinar presentations.

    http://www.schaeffersresearch.com

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