What is a Long Jelly Roll?
A long jelly roll is an options strategy designed to profit from arbitrage opportunities arising from divergences in option pricing. It identifies differences between the prices of a calendar spread made of call options at a specific strike price and the same calendar spread composed of put options.
Key Takeaways
- A long jelly roll leverages price discrepancies in horizontal spreads to create profitable trading opportunities.
- This strategy entails purchasing a long calendar call spread while selling a short calendar put spread.
- Returns on long jelly rolls are usually minor because the spreads’ costs are often closely aligned, making significant profit challenging.
Understanding Long Jelly Rolls
A long jelly roll is an intricate spread strategy that aims to maintain a neutral stance, ensuring the trade makes gains through price differences rather than directional movements of the stock. This is feasible because the cost of horizontal spreads made of call options should be nearly identical to those created with put options, after considering dividend payouts and interest costs. Consequently, call spreads are typically slightly more expensive than put spreads.
A jelly roll merges two horizontal spreads: purchasing the call spread while simultaneously selling the put spread, or vice versa. Profit stems from the difference between the bought and sold spreads. Manipulating this strategy, such as by varying the number of long positions or strike prices, can be risky but may also yield greater returns.
For most retail traders, transaction fees likely undermine profitability, given the narrow price gaps. However, occasional exceptions may offer keen traders a chance for easy earnings.
Long Jelly Roll Construction
Consider this scenario: On Jan. 8, Amazon (AMZN) shares trade around $1,700. The following call and put calendar spreads are available with expirations on Jan. 15 and Jan. 22 at the $1,700 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
A trader can lock in profit by buying these spreads at the stated prices, effectively generating a synthetic stock position equivalent to holding and shorting the stock simultaneously. The positions effectively cancel out, leaving only the difference in their prices as the realized profit. For instance, if the call spread costs a dollar less than the put option, the trader nets $1 per share or, for 10 contracts, $1,000.
Short Jelly Roll Construction
In a short jelly roll, the positions are reversed: a short call horizontal spread is paired with a long put horizontal spread. Here, the goal is for the call spread’s price to be significantly lower than that of the put spread. When such an imbalance not attributable to upcoming dividends or interest exists, the trade becomes attractive.
Related Terms: horizontal spread, calendar spread, option arbitrage, synthetic stock position.
