Long Jelly Roll
Candlefocus EditorThe underlying security for the long jelly roll can be a stock, ETF, or index. Call spreads involve the purchase of call options at one strike price and a simultaneous sale of calls at another strike price. These spreads can be used to hedge against stock price movements or to capture directional upsides. Put spreads involve the purchase of put options at one strike price and the simultaneous sale of puts at another strike price.
The long jelly roll strategy works because of an arbitrage opportunity. In an efficient market, a difference in price would be quickly exploited and arbitraged away. When the difference in price between the long and short calendar spreads is significant enough, it can provide investors with profit opportunities.
In order to properly set up a long jelly roll, investors should first calculate the net expiration dates of the long and short spreads. The expiration dates need to be the same in order to take advantage of the arbitrage opportunity.
Once the net expiration dates are determined, investors can set up the long and short spreads. The purchase of a long calendar call spread is bought at a certain price and the short calendar put spread is sold at a different price. When this price difference is large enough, it can lead to profitable trades.
The potential reward from a long jelly roll trade comes from correctly anticipating the direction of a stock’s price movement. Long jelly roll trades are usually implemented only when experienced investors are confident in their predictions. Additionally, long jelly roll strategy often involves a large amount of leverage, so investors can be exposed to significant risks when the market moves against their predictions.
In short, a long jelly roll is a sophisticated trading strategy used by advanced investors. It involves the purchase of a long calendar call spread and the simultaneous sale of a short calendar put spread. When prices between the long and short calendar spreads widens enough, it may be possible to exploit the arbitrage opportunity for potential profits. However, the potential risks involved in this strategy are also significant and should not be underestimated.