I have a query, in a scenario where the market is bullish and the concept of RollOver seems to be quite interesting, can one buy a call option on or before expiry and use the roll-over option…I had bought Nifty 19750 CE last week expiry at 20/ and squared-off having lost most of it and had I used the roll-over option I would have made money. Is this a good way or is this permitted.
Rollover is only for futures. Options get expired at the expiry date mentioned on the contract. That’s why option selling is considered profitable because OTM options expire worthless and the premium you sold at is your full profit.
Hi @VijayBhaskar -
There are two different concepts: futures roll (which you may be referring to) and options rolling (which is different). With options you can roll them out (further expiry), up (higher strike), or down (lower strike). From a technical standpoint, all you are doing is closing out a current trade and using some of that credit to reduce the cost of entering into another similar trade. If you were looking to roll out the option contract, in the Upstox app, you would execute to transactions: 1) close out the current position for a credit and then 2) open a position with a further out expiry.
There are pros/cons to doing this. You shouldn’t blindly do this as it can be considered throwing ‘good money after bad’. If something isn’t working, you are repeating the same strategy…just at a lower cost because you didn’t wait for the current trade to expire worthless. This could work in some instances where the criteria is right. For example: 1) if a trade just started working in your favor AND 2) it is moving in your favor slower than expected (likely won’t break-even prior to expiry) AND 3) theta decay is worsening the likelihood of profitability. In this case, you could consider rolling to a further out expiry.
Thanks for your reply, my query is how about buying Nifty CE @19750 @20/- when the spot was 19500 expiry 7 days. the spot price goes down and so my Call…I square off a day before expiry incurring a loss. My long trend view was bullish Nifty @20000. What if I buy 19750 CE on the day of expiry say 2/- and roll-over the next week the same 19750 CE would go 100…Am I correct? Please explain me the process of executing a roll-over of an option. Sorry, It may be a repeat for you.
While the idea of rollover is similar between futures and options, the mechanics are different. What you are describing is closer to futures. Sticking specifically to options, here is a mock example of rolling out:
- You believe the Nifty will go up to 20000, it is trading at 19500, so you buy a call at 19750 for 20 with one week until expiry. As a side note, the likelihood of this CE 19750 strike being in-the-money was only ~15% (I did a quick black-scholes calculation).
- The Nifty moved against you and with one day until expiration, your contract is trading at 1. You can do one of three things:
a) Continue to hold until expiry and hope for the best. Likely chance of profit is close to 0 and the contract will likely expire worthless.
b) Close out the trade and collect the 1 (loss of 19). You can then trade based on a different thesis or wait until the market reverses and shows upward movement to buy a call with a future expiry.
c) Continue to believe that the price target is 20000 but you understand that you can’t win with this current contract because it will expire worthless in a day. You will sell this contract for 1 and buy the next expiry. You could select any strike but if you choose the same one, it will be cheaper because it is further out of the money. Perhaps it will cost 10 vs. 20. Your credit from selling this week’s expiry will offset the new contract (will cost a total of 9). Of course, you will have a lower likelihood of success if you keep the same strike as before due to being more OTM.