Rolling LEAP Options When Implied Volatility Is Elevated
Summary
The document discusses when to roll a six-month call option into a longer-dated option, such as one expiring in nine or twelve months. Its main suggestion is to consider rolling when implied volatility in the existing LEAP is elevated and fewer than six months remain, because elevated volatility can make the option more expensive to sell. It distinguishes broad market volatility from volatility specific to the underlying equity, which may rise after adverse company news.
The answer also describes how a stock drop and higher volatility can complicate a call’s price behavior: volatility may support option value even as the underlying falls, with the outcome depending in part on delta and gamma. It does not provide a pricing model, data analysis, or a general rule for the relative prices of different expirations. The timing advice is a brief qualitative suggestion, not a tested strategy, and the document does not resolve whether the ratio between two LEAP prices remains stable as volatility changes.
Key ideas
- Elevated implied volatility may make an existing LEAP more attractive to sell when rolling.
- The answer suggests considering a roll when less than six months remain on the option.
- Broad market volatility and volatility specific to an equity may have different causes.
- A falling stock and rising implied volatility can affect a call’s value in opposing ways.
- The document gives no evidence that the price ratio between different expirations stays constant.
Tags
Full text
# What are good conditions to roll a leap further out in time? # What are good conditions to roll a leap further out in time? If you're hedging with a back month / leap option, what are good underlying / market conditions to move this option out even further in time? For simplicity, let's say you own a call with 6 months expiration. What conditions provide the best "prices", for selling this option, and then buying another further out in time, perhaps 9 months or 1 year out? I realize this might take different forms based on what the underlying is doing relative to the option, but perhaps those could be addressed as cases. --------------- Added after CQM'S answer, an additional clarifying question ------------- Does a leap with 6 months expiration, and then a leap with 1 year expiration (same strike), generally follow a ratio, regardless of implied volatility? So, say the 6 month leap was \$5, and the 12 month leap was $8, at a given market volatility level, this would make a ratio of 8/5, the cost of the 12 month leap over the 6 month leap. If the volatility of the equity & market subsequently changed, perhaps became quite a bit lower, would this ratio likely still be 8 / 5 between the 12 month leap and the 6 month leap? ## Answer by CQM (score 3, accepted) https://quant.stackexchange.com/a/2433 with leaps you have to consider market volatility and the equities volatility. market volatility increases the price of all options and is (merely) correlated with big market corrections. equity volatility can be due to a variety of factors, but with leaps it is after a big drop in that equity due to unfavorable news. leaps can get tricky due to their inverted pricing (due to volatility, stock drops, call increases in value, stock rises after volatility was high then call deflates in value before gaining intrinsic value back)* *depends on gamma and delta of course too when your leap has inflated volatility, less than 6 months left, that is a good time to roll
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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.