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CandleFocus Glossary Editor
Roll back is an important derivative trading technique used to reduce risk, limit losses, and save on transaction costs. As the term suggests, it involves exiting an existing derivatives position in order to replace it with a similar position but with a closer maturity date. It is a tool used to increase the long or short gamma exposure in an options position.
A gamma measures an option’s sensitivity to changes in the underlying spot market. By rolling the position closer to maturity, the gamma exposure is increased, providing the trader with more flexibility when it comes to managing the risk of their position. The same risk assessment applies to calls and puts, but with one difference; a call gives greater gamma exposure when rolled back, whereas a put gives greater exposure when rolled forward.
The roll back strategy can be used for both short-term and long-term derivatives positions. For short-term positions, it can help minimize losses when market fluctuations occur. Long-term positions can be adjusted to gain greater gamma exposure as the underlying spot price changes.
In addition to reducing risk and increasing flexibility, the roll back technique also helps traders to save on transaction costs. By rolling the position, the cost of buying and selling options is reduced, as the transactions are undertaken in the same market. This is opposed to trading in two separate markets, which would incur additional costs.
The roll back strategy can be part of a larger roll strategy, which includes roll forward, roll up and roll down. These roll strategies are used to ensure that the exposures of a derivatives position are optimized according to the trader’s risk appetite.
To summarize, roll back is an important derivative trading technique which is used to reduce risk, limit losses and save on transaction costs. By rolling positions closer to maturity, gamma exposure is increased and traders are able to better manage the risk of their position. The technique can be part of a larger roll strategy to ensure an optimal risk profile is achieved.
A gamma measures an option’s sensitivity to changes in the underlying spot market. By rolling the position closer to maturity, the gamma exposure is increased, providing the trader with more flexibility when it comes to managing the risk of their position. The same risk assessment applies to calls and puts, but with one difference; a call gives greater gamma exposure when rolled back, whereas a put gives greater exposure when rolled forward.
The roll back strategy can be used for both short-term and long-term derivatives positions. For short-term positions, it can help minimize losses when market fluctuations occur. Long-term positions can be adjusted to gain greater gamma exposure as the underlying spot price changes.
In addition to reducing risk and increasing flexibility, the roll back technique also helps traders to save on transaction costs. By rolling the position, the cost of buying and selling options is reduced, as the transactions are undertaken in the same market. This is opposed to trading in two separate markets, which would incur additional costs.
The roll back strategy can be part of a larger roll strategy, which includes roll forward, roll up and roll down. These roll strategies are used to ensure that the exposures of a derivatives position are optimized according to the trader’s risk appetite.
To summarize, roll back is an important derivative trading technique which is used to reduce risk, limit losses and save on transaction costs. By rolling positions closer to maturity, gamma exposure is increased and traders are able to better manage the risk of their position. The technique can be part of a larger roll strategy to ensure an optimal risk profile is achieved.