Instead of letting your option expire, you roll it over. That means you close the contract that's about to expire and simultaneously open a new one with an expiration date further out in time.
This process can include a new strike price as well. Rolling up involves setting a higher strike price. Rolling down has the trader purchasing a new contract with a lower strike price.
You hold an option to buy 100 shares of BAC at a strike price of $30, with a May expiration. It's getting close to the expiration date. You want to use a roll up strategy. So you close out your current option and buy a new one. Your new contract gives you the right to buy 100 shares of BAC at a strike price of $32, with a July expiration.
Related or Semi-related Video
Finance: What Is a Call Option?25 Views
finance a la shmoop. what is a call option? option? option, where are you? okay
yeah yeah. not phone options, call options. and a close but no cigar. a call option [man smokes in a tub of cash]
is the right to call or buy a security. the concept is easy the math is hard.
you think Coca Cola's poised for a breakout as they go into the new low
calorie beverage business. their stock is at 50 bucks a share and you can buy a [man stands on a stage as crowd cheers]
call option for $1. well that call option buys you the right
to then buy coke stock at 55 bucks a share anytime you want in the next
hundred and 20 days. so let's say Coke announces its new sugarless drink flavor
zero it's two weeks later and the stock skyrockets to fifty eight dollars a
share. you've already paid the dollar for the option now you have to exercise it. [man lifts weights]
so you buy the stock and you're all in now for fifty five dollars plus one or
fifty six bucks a share and your total value is now fifty eight bucks. well you
could turn around today and sell the bundle that moment, and you'll have
turned your dollar into two dollars of profit really fast. and obviously had the [equation on screen]
stock not skyrocketed so quickly well you would have lost everything. still you
lucked out and now you're sitting on some serious cash, courtesy of your call [two men in a tub of cash]
options. as for Coke flavor zero turned out to be nothing more than canned water.
Up Next
What are stock options? Stock options are derivative contracts, each representing 100 shares, that give the holder the right to buy (call) or sell...
What is a put option? A put option is a type of contract that lets the investor sell shares of a stock at a certain price and within a window of ti...
The intrinsic value of an option is the share price of a stock minus its strike price - i.e. the "in the money" amount.