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When an option is rolled, it is placing a second bet, different than the original one.

Why do people think this is a good idea?

There are an infinite number of other bets one could place -- at different times/strikes on that stock, on different stocks, etc. Is there any reason to believe that the roll is preferable to all these other things one could do with you money?

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  • Are you asking why people roll options versus letting them expire? Or why they roll options to similar contracts rather then something completely different?
    – D Stanley
    Nov 17 '20 at 17:08
  • asking why people roll to similar contracts rather than using their money on a completely different trade Nov 17 '20 at 21:11
  • Good answers everyone. Hard for me to pick the best one, I think they are all good. Nov 17 '20 at 21:11
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Suppose you rent an apartment with a one-year lease. Near the end of that one year, the landlord informs you that you will not be able to rent that specific apartment. You can choose another identical apartment in the building, or move somewhere else. Assuming all other costs to be equal (moving, changing utilities, addresses, etc.), you'd be more inclined to stay in the area because it's familiar to you. Might there be better deals in other locations? Perhaps, but assuming your view of the world (commute, etc.) is the same, you're more likely to stick with what you know.

There's no specific financial incentive to roll over options versus investing in something completely different. The transaction costs are exactly the same. You bought the first option for a reason (perhaps you were bullish and bought call options to limit downside, or you're hedging some specific exposure). If those reasons still hold, rolling your options provide you with an easy way to invest in a familiar environment, where you don't have to spend time researching other possibilities.

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The 'bet' you placed with an option is typically motivated by your believe that a certain movement (or non-movement) in the underlying stock is coming.
Often, the option trader still believes it is coming - just a bit later - otherwise he would have already sold the options, right? If the options near their expiry date, he needs to 'roll them' so he can still profit from the expected change when it comes.

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It's not as black and white as you suggest. Perhaps one believes that the current bet is still a good one but prefers to alter the trade's parameters after price movement. Options offer you the ability to tailor the risk/reward to your liking and adjustments (rolls) achieve that.

A simple example. XYZ is $100 and I buy a high delta 6 month $80 call for $25. XYZ quickly rises to $115 and I roll the $80 call up to a strike of $95 (same expiration) for a credit of $13.

At the cost of some delta, I've lowered my cost basis and I have practically the identical position (bet) as I originally had except at a higher underlying price.

Another example. Suppose I'm selling naked puts to acquire a stock at a lower price (or keep the income if I'm not assigned). If XYZ is has not changed much as expiration nears, the premium will have dwindled.

So it's a week until expiration and I still would like to own the stock. The short put's premium is 5 cents. The 3 week same strike put is 45 cents. Why should I wait one week for 5 cents when I can collect 40 cents for 3 weeks after the roll? That's 13+ cents per week. It's a no brainer. Roll the put.

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