Long Jelly Roll
A long jelly roll is an option strategy that aims to profit from a form of arbitrage based on option pricing. It looks for a difference between the pricing of a horizontal spread (also called a calendar spread) composed of call options at a given strike price and the same horizontal spread with the same strike price composed of put options.
Definition: The long jelly roll is an options strategy aimed at profiting through arbitrage based on options pricing. It seeks the difference between the horizontal spread (also known as a calendar spread) formed by call options at a certain strike price and the horizontal spread formed by put options at the same strike price.
Origin: The long jelly roll strategy originated during the development of the options market when investors discovered that by simultaneously operating call and put options, they could find arbitrage opportunities in market fluctuations. As the options market matured, this strategy became widely used.
Categories and Characteristics: The long jelly roll strategy mainly consists of two types: the horizontal spread of call options and the horizontal spread of put options. The horizontal spread of call options refers to the spread between call options with the same strike price but different expiration dates; the horizontal spread of put options refers to the spread between put options with the same strike price but different expiration dates. The characteristic of this strategy is that by simultaneously operating these two spreads, investors can find arbitrage opportunities in market fluctuations.
Specific Cases: Case 1: Suppose a stock is currently priced at $100. An investor can buy a call option with a strike price of $100 expiring in one month and sell a call option with the same strike price expiring in two months, forming a horizontal spread of call options. Then, the investor buys a put option with a strike price of $100 expiring in one month and sells a put option with the same strike price expiring in two months, forming a horizontal spread of put options. Through these two operations, the investor can find arbitrage opportunities in market fluctuations. Case 2: Suppose a stock is currently priced at $200. An investor can buy a call option with a strike price of $200 expiring in three months and sell a call option with the same strike price expiring in six months, forming a horizontal spread of call options. Then, the investor buys a put option with a strike price of $200 expiring in three months and sells a put option with the same strike price expiring in six months, forming a horizontal spread of put options. Through these two operations, the investor can find arbitrage opportunities in market fluctuations.
Common Questions: 1. How should investors choose the appropriate strike price and expiration date when using the long jelly roll strategy? Answer: Investors should choose the appropriate strike price and expiration date based on market expectations and their own risk tolerance. 2. What are the main risks of the long jelly roll strategy? Answer: The main risks include market volatility risk and options pricing error risk.
