Long Jelly Roll
A long jelly roll is an options arbitrage strategy that seeks to profit from price differences between two horizontal (calendar) spreads at the same strike: a call calendar spread and a put calendar spread. The strategy is market‑neutral and aims to capture the small pricing gap that, in theory, should reflect only dividends and carry (interest) differences.
How it works (concept)
- A horizontal/calendar spread uses options with the same strike but different expirations.
- A call calendar spread and an equivalent put calendar spread should be priced similarly, except for the effect of dividends and interest. Typically the call spread trades slightly higher than the put spread if a dividend is expected before expiration.
- A jelly roll combines both spreads so that the net position is delta‑neutral (synthetically long and short stock positions cancel). Profit comes from the price difference between the two spreads rather than directional stock movement.
Long jelly roll construction
- Buy a call calendar spread (long near-term call short longer-term call).
- Sell a put calendar spread (short near-term put long longer-term put).
- In practice, buy the cheaper spread and sell the more expensive one. The ideal situation is when the call spread is cheaper than the put spread by more than transaction costs, locking in the difference.
Example:
– Assume AMZN at $1,700 and the 1-week Jan 15–Jan 22 spreads at the $1,700 strike:
– Call calendar: price = 9.75
– Put calendar: price = 10.75
– Buying the call spread and selling the put spread locks in a $1.00 per‑share difference. For 10 contracts (1,000 shares), that’s a $1,000 gross profit before fees and commissions.
Short jelly roll
- The short jelly roll is the reverse:
- Sell the call calendar spread and buy the put calendar spread.
- It profits when the put spread is priced lower than the call spread by more than carry/dividend effects and transaction costs.
Variations and risks
- Traders may alter the number of legs or use different strikes. These adjustments can increase potential return but add complexity and risk (e.g., greater exposure to volatility, expiration mismatch, or execution risk).
- The strategy depends on precise pricing relationships. If dividend expectations or interest rates change, the theoretical price differential can shift.
- Execution and transaction costs often eliminate the arbitrage for retail traders because the pricing discrepancy is usually only a few cents.
Key takeaways
- A jelly roll is a market‑neutral arbitrage that combines a call calendar spread and a put calendar spread at the same strike.
- The trade profits from pricing differences that should reflect only dividends and financing costs.
- Practical profitability is rare for retail traders due to small mispricings and transaction costs; careful attention to dividends, interest, and execution is essential.