What is Long Jelly Roll?

974 reads · Last updated: December 5, 2024

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 from the development of the options market. As the complexity of options trading increased, investors began exploring more sophisticated arbitrage strategies. The name likely derives from its complex structure and multi-layered arbitrage opportunities.

Categories and Features

The Long Jelly Roll strategy is mainly divided into two types: Bullish Long Jelly Roll and Bearish Long Jelly Roll. The Bullish Long Jelly Roll involves buying and selling call options with different expiration dates, while the Bearish Long Jelly Roll involves buying and selling put options with different expiration dates. Its feature is to arbitrage the difference in time value, suitable for low volatility market environments.

Case Studies

Case Study 1: Suppose in a certain market, an investor finds a significant difference between the calendar spread of call options and put options at a certain strike price. By constructing a Long Jelly Roll strategy, the investor can profit from changes in market volatility. Case Study 2: In 2020, an investment firm used the Long Jelly Roll strategy to arbitrage in the tech stock market, successfully capturing profits from changes in market volatility.

Common Issues

Common issues investors face when applying the Long Jelly Roll strategy include misjudging market volatility and inaccuracies in options pricing models. Additionally, transaction costs and liquidity issues may affect the strategy's effectiveness.

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