#24 - Trading Options Near Expiration

Hey everyone, Kirk here again at Option Alpha and welcome back to the daily call. Today, we’re going to be talking about trading options near expiration. Now, I have to warn you, as I probably will in the future for a lot of these calls that my kids are sleeping right now, so this is done literally in the middle of the day and if you hear random screams or movements, that’s just her in the background waking up because she could wake up at anytime and it’s like a time bomb going off when they do. Those of you who are parents, you know that. Trading options near expiration, I think there’s a couple of things that we want to just touch on with trading options near expiration. One, we know that as we get closer to options expiration which is usually the third Friday in the month for monthly expirations, weekly expirations expire every week, that as you get closer to expiration, your risk of assignment especially if you’re in the money goes way up. Really, it’s that first couple of days. Actually, expiration week, your risk of assignment goes up, so the Monday, Tuesday of expiration week, if options expire on Friday. But then really, as you even get further into expiration week itself, Thursday and Friday, then obviously the assignment risk goes dramatically higher like parabolic. Now, we don’t have exact numbers from the OIC or the OCC, but we know that that risk is much, much, much higher. What I always suggest you do is you obviously adjust, manage, hedge, do whatever you want to do the month of expiration that you’re working in. If you’re working in September, then you make sure you make your adjustments in September. Give your stocks and options enough time to actually move as you’re heading towards expiration, but once you get into that expiration month, then you want to start thinking about it and start analyzing adjustments. When you get into expiration week and actually trading options near that expiration date, you want to be more diligent in closing out positions that are profitable first off. Take money off the table, take winners off. It doesn’t have to be a full winner. If it didn’t hit a profit target, but it’s still profitable, if you’re in expiration week, take that thing off. And then second, closing out positions at first that are deep in the money, so anything that’s really not profitable. If you sold a call spread and the market moved way up, it’s probably not a high likelihood that the stock moves way down in two days. Get that position off, buy it back, close it out, so you remove the assignment risk. Then what you’re left with is you’re left with any positions that are in the middle, they’re kind of dancing around breakeven, small profit, small winner, etcetera and you want to take those positions day by day because at that point, if your options are in the money, but just in the money by a dollar or a couple of cents, there’s probably not too much risk that you’re going to get assigned because it could go either way. But as soon as it starts going deep in the money, you want to close the position. What I always suggest is take those positions that are neutral, meaning that they’re not making a lot of money, not losing a lot of money, they’re still undecided if you will and take them day by day. If the market moves favorable one day, take it one more day. But as soon as it moves against you, you just want to take that position off because we want to remove that assignment risk. The last thing of course that we’ll talk about is of course, you can get assigned during these periods. That doesn’t mean that because most assignment risk is on Friday that you couldn’t get assigned early on Monday. We’ve always done podcast and have video training on how to manage that. But that process is totally manageable. It’s not going to kill you. Even if you have a small account, you can definitely deal with it. You just want to close out of any stock that you are assigned either long or short. That’s the real key of it, is if you don’t want it, you don’t want to hold it, don’t have the capital to hold it, just go ahead and reverse the trade. Brokers lets you do this even if you don’t have the capital to do it because they know they want to reverse the trade and close out that stock that same day. Hopefully that helps out. As always, if you have any questions, let me know. Until next time, happy trading!

2356 232

Suggested Podcasts

Mel H Abraham, CPA, CVA, ASA

A place of discovery, collaboration, and idea generation

Major League Soccer

Allison Horrocks and Mary Mahoney

Jake Barton

NEBOnutye Production