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 Intrinsic Value (of An ...6 Views
Finance allah shmoop what is the intrinsic value of an
option All right this is brandi She owns a twelve
dollars strike price call option toe buy a share of
my fifteen minutes are up dot com a retirement home
chain for reality tv stars who recently gained self awareness
Well the stock is trading for fifteen bucks a share
of this moment Her strike price is twelve so the
intrinsic value of that option is fifteen minutes twelve or
three bucks that is it is three dollars in the
money and if brandy converted it into a share this
moment and then immediately sold the stock for fifteen dollars
in cash well she'd make three bucks But there's a
catch per call option doesn't expire for five weeks so
that three dollars in the money is actually worth more
than three dollars because she has data or time yet
to exercise and convert or just sell the option itself
So it's worth mohr because well a stock might go
up from fifteen dollars in overtime Stocks go up so
in the next five weeks well couldn't go up a
dime twenty cents twenty five cents and make that three
Dollars worth three ten three twenty three Twenty five Sure
sure it could happen So yeah that's The difference between
actual value and intrinsic value You get seita kickers in
there making the option's worth more than just converting them
into stock and selling them right there And yeah it
looks like our one and a half minutes are up
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