Rolling

Rolling, in the world of investing, is the action of extending a financial commitment. Think of it as hitting the snooze button on an investment's deadline. It most commonly refers to the process of closing an existing derivatives position, like an options contract or a futures contract, that is nearing its expiration date and simultaneously opening a new, similar position with a later expiration date. This allows an investor to maintain their market exposure without letting the position expire. The term is also used in a different but equally important context: performance analysis. Here, we talk about rolling returns, a powerful method for measuring an investment's performance over consistent, overlapping time periods (like successive 5-year chunks) to get a much clearer picture of its consistency and volatility than a simple start-to-finish return figure could ever provide. Both concepts are essential for navigating modern markets.

Imagine you're an options trader. You bought a call option on Company ABC because you believe its stock price is heading up. Your option gives you the right to buy the stock at a set price, but only until a specific expiration date. As that date looms, you realize two things: you were right, the stock is rising, and you believe it has much further to go. You don't want your winning bet to end. What do you do? You roll it. To roll the position, you would sell your current call option (locking in the profit you've made so far) and immediately use the cash to buy a new call option on Company ABC. This new option would have a later expiration date, giving your investment thesis more time to play out. This simple act is known as “rolling forward.”

Rolling isn't just about extending time. You can also adjust the terms of your bet.

• Rolling Up/Down: This involves changing the strike price (the price at which you can buy or sell the underlying stock). If you're holding a profitable call option, you might “roll up” to a higher strike price. This typically allows you to take some cash off the table while still maintaining a bullish position.
• Rolling Forward and Up/Down: The most common type of roll, where an investor changes both the expiration date and the strike price to perfectly recalibrate their position based on market movements and their future expectations.

While powerful, remember that every roll involves closing one trade and opening another, which means you'll incur transaction costs.

Switching gears from active trading to performance analysis, “rolling” takes on a whole new meaning that is vital for long-term investors. A rolling return is a far more honest way to look at the performance of a stock, fund, or strategy over time. Instead of looking at a single, fixed-period return (e.g., the total return from January 1, 2014, to December 31, 2023), rolling returns measure performance over a series of overlapping periods. For example, a 3-year rolling return would show you the return for:

• 2018-2020
• 2019-2021
• 2020-2022
• 2021-2023
• …and so on.

This method smooths out the “luck of the draw” associated with arbitrary start and end dates. A fund manager might look like a genius if their 10-year return starts at the bottom of a crash and ends at the peak of a bubble. Rolling returns reveal how an investor would have fared if they had invested at any point during that decade, providing a robust view of consistency and risk. It answers the question: “How often did this investment actually deliver a good return over a reasonable holding period?”

For a value investing practitioner, understanding both types of rolling is crucial, but for very different reasons.

1. Rolling Positions: A core tenet of value investing is viewing a stock as ownership in a business, not a trading chit. While masters like Warren Buffett have used options strategically, frequently rolling derivative positions can lead to high costs and encourages a short-term, speculative mindset. It's a tool in the toolbox, but one that should be used sparingly and with a clear, business-focused rationale, not just to chase market momentum.
2. Rolling Returns: This, on the other hand, is a value investor's best friend when analyzing potential investments, especially mutual funds or ETFs. Value investing is about finding quality and consistency that can stand the test of time. A simple annualized return can be deceptive. A rolling return analysis reveals the character of an investment—does it perform steadily across different market environments, or is its track record built on a few lucky years? It helps you separate skilled, consistent managers from those who were simply in the right place at the right time.