Long Jelly Roll

90/10 Strategy

What is a long roll of jelly?

A long jelly roll is an options strategy that aims to benefit from a form of arbitrage based on the pricing of options. The jelly roll searches for a difference between the price of a horizontal spread (also called calendar spread) composed of call options at a given exercise price and the same horizontal spread with the same exercise price composed of options of sale.

Key points to remember

  • A long jelly roll is a spread trading strategy that exploits price differences in horizontal spreads.
  • The strategy includes buying a long calendar call spread and selling a short calendar sales spread.
  • The two spreads of this strategy are generally priced so close to each other that there is not enough profit to be made to justify its implementation.

How a Spread Shop Works

A long jelly roll is a complex spread strategy which positions the spread as neutral, fully hedged, relative to the directional movement of the share price so that the transaction can instead benefit from the difference in purchase price of these spreads .

This is possible because horizontal spreads composed of put options must have the same price as a horizontal spread composed of put options, except that the put option must have the payment of the dividend. and the cost of interest subtracted from the price. Therefore, the price of the goodwill should generally be a little higher than the price of the goodwill – the higher amount depends on the payment of a dividend before expiration.

Build a Jelly Roll Spread Business

A jelly roll is created from the combination of two horizontal gaps. The spread can be constructed as a long spread, which means that the spread call was bought and the spread put was sold, or as a short spread, where the spread put is bought and the spread call is sold. The strategy is to buy the cheapest spread and sell the longest spread. In theory, profit comes when the trader manages to keep the difference between the two spreads.

For retail traders, transaction costs would likely make this business unprofitable, since the price difference is rarely more than a few cents. But sometimes, a few exceptions can arise, which makes profit easy for the astute trader.

Long jelly roll construction

Consider the following example where a trader would like to build a long spread of jelly roll. Suppose that on January 8 during normal market hours, Amazon shares (AMZN) were trading around $ 1,700.00 per share. Also assume that the following January 15 / January 22 buy and sell spreads (with weekly expiration dates) are available to retail buyers at the strike price of $ 1,700:

Spread 1: call from January 15 (short) / call from January 22 (long); price = 9.75

Spread 2: January 15 (short) / January 22 (long); price = 10.75

If a trader is able to buy Spread 1 and Spread 2 at these prices, he can block a profit because he has actually bought a long position on the stock at 9.75 and a short position on the stock at 10.75 . This happens because the long call and short selling position creates a synthetic stock position that is very similar to holding stocks. Conversely, the remaining short buy position and the long buy position create a synthetic short position.

Now the net effect becomes clear as it can be shown that the trader has initiated a calendar transaction with the ability to enter the stock at $ 1700 and exit the stock at $ 1700. The positions cancel out, leaving only the difference between the prices of the option spreads, which is a concern that counts.

If the horizontal buy spread can actually be acquired for a dollar less than the put option, the trader can lock $ 1 per share and per contract. A position on 10 contracts would therefore represent $ 1,000.

Short jelly roll construction

In the small jelly roll, the trader uses a short call horizontal spread with a long term horizontal spread – the opposite of long construction. Spreads are constructed with the same horizontal spread methodology, but the trader wants the price of the spread call to be much lower than that of the put. If such a price mismatch occurs which is not explained by dividend payments or future interest charges, trade would then be desirable.

Jelly Roll Spread Trade Variations

This strategy can be approached by implementing a variety of modifications, including increasing the number of long positions on one or both horizontal spreads. Strike prices can also vary for each of the two spreads, but such a change creates additional risks for trading.

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