Rolling calls is a term commonly used in the field of finance and investing. It refers to an investment strategy where an investor periodically sells an existing call option and simultaneously purchases another call option with a later expiration date.
By ‘rolling’ the call, investors aim to maintain their market exposure and potentially generate additional income or adjust their position based on changing market conditions.
The process of rolling calls involves a few key steps:
1. Evaluating the existing call option: Before rolling a call, investors assess the current market value, the remaining time until expiration, and any potential profit or loss associated with the existing option.
2. Selecting the new call option: Investors choose a new call option with a later expiration date and a strike price that aligns with their investment strategy and objectives.
3. Selling the existing call option: Once the new call option is selected, the investor sells their existing call option, typically at the prevailing market price. The proceeds from this sale can help offset the cost of purchasing the new call.
4. Buying the new call option: After selling the existing call, the investor purchases the new call option with the later expiration date.
5. Repeat the process: Depending on market conditions and individual investment goals, investors may repeat the process of rolling calls multiple times during the life of their investment.
The main reasons why investors choose to roll calls include:
1. Capitalizing on market fluctuations: Rolling calls allows investors to adjust their position based on changing market conditions and potentially benefit from price movements.
2. Extending duration: By purchasing a call option with a later expiration date, investors can extend their position and maintain market exposure for a longer period.
3. Generating income: Rolling calls can help investors generate additional income through the sale of the existing call option, which can offset the cost of buying the new call option.
It’s important to note that rolling calls involves risks, including potential losses if the underlying asset’s price moves unfavorably. Therefore, investors should carefully evaluate their investment strategy, consult with a financial advisor, and consider their risk tolerance before implementing a rolling calls strategy.