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Managing Trades On Expiration What happens to your positions on expiration? Spreads on expiration 2.

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Presentation on theme: "Managing Trades On Expiration What happens to your positions on expiration? Spreads on expiration 2."— Presentation transcript:

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2 Managing Trades On Expiration What happens to your positions on expiration? Spreads on expiration 2

3 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. 3

4 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.

5 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.

6 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. 6

7 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 7

8 Stock #1: HLF My Position: I sold the HLF May 2 nd Weekly Put Spreads I am SHORT 1 May 2 nd 59 Puts and LONG 1 May 2 nd 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

9 Stock #2 :BWLD My position: I am LONG the BWLD May 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

10 Stock #3 : HA My position: I am LONG the HA May 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

11 Stock #3 : GS My Position: The GS Apr Iron Butterfly I am Long 1 Apr 155 Put, short 1 Apr Call and 1 Apr 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 puts become long stock. Other options are worthless Nets out FLAT. Nothing to do. Between $155 and $157.5: My puts become LONG stock and all other options go out worthless. I need to SELL stock or BUY back my puts. Between $157.5 and $160: My SHORT calls become SHORT stock and my other lines go out worthless. I need to BUY stock or BUY back by calls Above $160: My LONG 160 calls become LONG stock and my SHORT Calls become SHORT stock Position nets out FLAT. Nothing to do.

12 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. 12

13 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. 13

14 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 14

15 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. 15

16 SPECIAL TOPIC COURSE: How to Take Money from the Market Makers Use Call-Put Ratio to Determine Investor Sentiment Use the Market Makers Target for Iron Condors Learn Best Time of Day and Week to Trade Credit and Debit Spreads Learn when and why to Trade a Credit or Debit Spread Learn how to Potentially Profit 600% in Options Using Market Maker Targets $ TOMORROW: May 1st at 7:00 PM


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