Long Jelly Roll

What Is a Long Jelly Roll?

A long jelly roll is an option strategy that expects to profit from a form of arbitrage in view of option pricing. It searches for a difference between the pricing of a horizontal spread (likewise called a calendar spread) made out of call options at a given strike price and a similar horizontal spread with a similar strike price made out of put options.

Seeing Long Jelly Rolls

A long jelly roll is a complex spread strategy that positions the spread as neutral, completely hedged, comparable to the directional movement of the share price so the trade can rather profit from the difference in the purchase price of those spreads.

This is conceivable on the grounds that horizontal spreads comprised of call options ought to be priced equivalent to a horizontal spread comprised of put options, with the exception that the put option ought to have the dividend payout and interest cost deducted from the price. So the price of the call spread ought to typically be a bit higher than the price of the put spread — how much higher relies upon whether a dividend payout will happen before expiration.

A jelly roll is made from the combination of two horizontal spreads. The spread can be built as a long spread, meaning the call spread was bought and the put spread was sold, or as a short spread, where the put spread is bought and the call spread is sold. The strategy calls for buying the less expensive spread and selling the longer spread. In theory, the profit comes when the trader will keep the difference between the two spreads.

Varieties of this strategy can be drawn closer by executing various modifications remembering expanding the number of long positions for either of the horizontal spreads. The strike prices can likewise be fluctuated for every one of the two spreads, yet any such modification makes extra risks to the trade.

For retail traders, the transaction costs would probably make this trade unprofitable, since the price difference is rarely in excess of a couple of pennies. Yet, once in a while a couple of exceptions might happen creating a simple gain feasible for the sharp trader.

Long Jelly Roll Construction

Consider the accompanying illustration of when a trader would need to build a long jelly roll spread. Assume that on Jan. 8 during normal market hours, Amazon stock shares (AMZN) were trading around $1,700.00 per share. Assume likewise the accompanying Jan. 15-Jan. 22 call and put spreads (with week after week expiration dates) were available to retail buyers for the $1700 strike price:

Spread 1: Jan. 15 call (short)/Jan. 22 call (long); price = 9.75

Spread 2: Jan. 15 put (short)/Jan. 22 put (long); price = 10.75

In the event that a trader can buy Spread 1 and Spread 2 at these prices, then they can lock in a profit since they have effectively purchased a long position in the stock at 9.75 and a short position in the stock at 10.75. This happens on the grounds that the long call and the short put position make a synthetic stock position that acts a lot of like holding shares. On the other hand, the excess short call position and long put position make a synthetic short stock position.

Presently the net effect turns out to be clear since it tends to be shown that the trader initiated a calendar trade with the ability to enter the stock at $1,700 and exit the stock at $1,700. The positions cancel each other out leaving the main difference between the option spread prices to be a concern that is important.

In the event that the call horizontal spread can really be acquired for one dollar not exactly the put option, then, at that point, the trader can lock in $1 per share per contract. So a 10 contract position would net $1,000.

Short Jelly Roll Construction

In the short jelly roll, the trader utilizes a short call horizontal spread with a long put horizontal spread — something contrary to the long construction. The spreads are developed with a similar horizontal spread methodology yet the trader is searching for the call spread pricing to be a lot of lower than the put spread. Assuming such a price mismatch were to happen that isn't made sense of by impending dividend payments or interest costs, then the trade would be desirable.

Features

• The two spreads in a long jelly roll are normally priced so close together that there isn't sufficient profit to be made to legitimize carrying out it.
• A long jelly roll is an option spread-trading strategy that exploits price differences in horizontal spreads.
• Long jelly rolls incorporate buying a long calendar call spread and selling a short calendar put spread.