Dollar Roll

A dollar roll is a whole process investors run when they are buying and selling and then buying back mortgage-backed securities. First, the investor must already be invested in a mortgage-backed security, which is an asset made up of people’s mortgages as the debt to be repaid.

To get their dollar roll on, the investor sells the mortgage-backed security, and then buys it back. That middle-time, called the “roll period,” is where they don’t own the security, which means they’re missing out on collecting interest on the security during that time.

So why sell it and buy it back? The investor uses the money they got from selling the mortgage-backed security to invest in something else...and hopefully make more returns doing that. Eventually, they’ll buy back the mortgage (or a really similar one, because the IRS), which they can do most of the time at a lower sale price than before. The investor makes some money on this difference in sales price, which is called “the drop.”

The investor makes money off of the “roll specialness,” which is the drop plus the interest they earned with their money elsewhere during the roll period. Drop that dollar roll like it’s hot, like it’s hot...