Managing Trades On Expiration

Managing Trades On Expiration

• What happens to your positions on expiration?

• Spreads on expiration

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Managing Trades On Expiration

What is the goal of managing expiration?

• My main goal on expiration is to make sure I do not have ANY residual stock position on Monday as result of expiration/assignment.

• Stocks have gap risk over the weekend, holding a stock position is VERY risky.

• Remember that your FIRST goal in trading is managing risk and managing profits second. Expiration is key to risk management.

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Managing Options on Expiration

Goal: To manage my position, so I do NOT take delivery on any stock. I want to close positions out completely.

LONG In-the-Money Calls: These Calls will turn into LONG stock, so can hedge them by selling them out or Selling Stock.

LONG In-the-Money Puts: These Puts will turn into SHORT stock, so can hedge them by selling them back or Buying Stock.

LONG Out-of-the-Money Calls OR Puts: If I can get any money, $.02 or $.05 and they are going to expire worthless for sure, might as well take some BEER money.

Managing Trades On Expiration

SHORT In-the-Money Calls: They will be Short Stock so need to Buy the Calls or Buy Stock

SHORT In-the-Money Puts: They will be Long Stock, so need to Buy the Puts or Sell Stock

SHORT Out-of-the-Money Puts or Calls: If they are Close to being ITM or potential news, I will take them off and waste money on them. NEVER EVER know what news can come out at 3:00-3:30 CST.

Netting Position Out: If I am LONG or Short a Call or Put Spread and BOTH Options are expiring In-the-Money then NO need to waste commissions taking them off. Know your exercise fees.

More Netting Out Position: If I am Long or Short Call or Put Spreads that are Out-of-the-Money NO need to waste commissions taking them off.

Managing Trades On Expiration

When do I need to manage my expiration?

• I need to have my positions closed out or managed by the end of the day.

• Friday expiration is NOT the day to leave 30 min early to go to the golf course.

• You have to be in front of the screen on expiration Friday.

• Remember managing expiration is part of managing risk.

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Managing Trades On Expiration

Spreads on expiration:

It is important for a trader to net out their position going into expiration.

Watch levels on expiration:

Verticals:3 levels

Butterflies: 4 levels

Calendars:2 Levels

Straddles:3 Levels

Strangles:3 Levels

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Stock #1: HLF My Position: I sold the HLF May 2nd Weekly 59-58 Put Spreads

I am SHORT 1 May 2nd 59 Puts and LONG 1 May 2nd 58 Put

There are 3 levels I need to watch on expiration:

Above $59: • All options will expire worthless. Nothing for me to do.

Between $58 and $59: • My SHORT 59 puts will become LONG stock and my LONG 58 puts expire worthless• I have to SELL stock or BUY back my SHORT 59 Puts

Below $58: • My SHORT 59 puts become LONG Stock and my LONG 58 puts become SHORT stock• Position Nets out FLAT, Nothing to do

Stock #2 :BWLD My position: I am LONG the BWLD May 140-150-160 Call Butterfly

I am long 1 May 140 Call, Short 2 May 150 Calls, and Long 1 May 160 Call

There are 3 levels I need to watch on expiration:

Below $140: • At this level ALL of my options expire worthless and there is NOTHING I have to do.

Between $140 and $150: • At this level my LONG 140 Calls become LONG stock and the other lines are worthless. • I need to SELL stock or SELL my 140 calls.

Between $150 and $160: • My LONG 140 calls become LONG stock, my SHORT 150 calls will become SHORT stock

TWICE, my LONG 160 calls are worthless. • I need to BUY stock or BUY back 1 of my SHORT 150 calls

Above $160: • ALL options are exercised or assigned and my position will net out FLAT• Nothing to do

Stock #3 : HA My position: I am LONG the HA May 14-15 Call Spreads

I am LONG the HA May 14 Calls and SHORT the May 15 Calls

There are 3 levels I need to watch on expiration:

Below $14: • At this level ALL of my options expire worthless and there is NOTHING I have to do.

Between $14 and $15: • At this level my LONG 14 Calls become LONG stock and my SHORT 15 calls are worthless• I have to SELL stock or SELL my May 14 calls

Above $15: • ALL options are exercised or assigned and my position will net out FLAT• Nothing to do

Stock #3 : GS My Position: The GS Apr 155-157.5-160 Iron Butterfly

I am Long 1 Apr 155 Put, short 1 Apr 157.5 Call and 1 Apr 157.5 Put, Long 1 Apr 160 Call

There are 4 levels I need to watch on expiration:

Below $155: • My LONG 155 puts become short stock, My short 157.5 puts become long stock. Other

options are worthless• Nets out FLAT. Nothing to do.

Between $155 and $157.5: • My 157.5 puts become LONG stock and all other options go out worthless.• I need to SELL stock or BUY back my 157.5 puts.

Between $157.5 and $160: • My SHORT 157.5 calls become SHORT stock and my other lines go out worthless. • I need to BUY stock or BUY back by 157.5 calls

Above $160:• My LONG 160 calls become LONG stock and my SHORT 157.5 Calls become SHORT stock• Position nets out FLAT. Nothing to do.

Managing Trades On Expiration

Understanding Your Obligations:

• What is the main difference between buyers and sellers of options?

• Buyers of options have the right but not the obligation to buy or sell the underlying for a specified price at a specified time.

• Sellers (writers) of options contracts have to deliver the underlying to the buyer should the buyer exercise. They have no choice in the matter.

• Important to understand when talking about PIN RISK.

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Managing Trades On Expiration

Pin Risk:

• Refers to a situation where the price of the underlying is very close to the option strike going in to expiration.

• This is a risky situation for short option holders because they do not know for sure if the buyer will exercise their position.

• Since assignment is unsure, short option holders cannot effectively hedge their positions

• If not managed properly an unwanted stock position could be assigned.

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Managing Trades On Expiration

Pin Risk:

• At the open of expiration Friday identify the positions in your book that may have pin risk.

• These positions need to be managed by the end of the day.

• I cannot have ANY pin risk. This is a poor risk management practice.

• I had to manage pin risk in the GS Trade

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Summary

• My main goal on expiration is to make sure I do not have ANY residual stock position on Monday as result of expiration/assignment.

• Stocks have gap risk over the weekend, holding a stock position is VERY risky.

• Friday expiration is NOT the day to leave 30 min early to go to the golf course.

• Remember managing expiration is part of managing risk.

• Buyers of options have the right but not the obligation to buy or sell the underlying for a specified price at a specified time.

• At the open of expiration Friday identify the positions in your book that may have pin risk.

• Goal on expiration is to have no residual stock position.

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