Hey everyone.
This is Kirk, here again at optionalpha.com.
In this video, I want to talk about expiration week position checklist and our guide to getting
through expiration week as it's coming up.
As you near options expiration week, you'll need to make some decisions on positions that
are basically “on the fence”, so positions that are either a little bit of a loser, a
little bit of a winner, right in the middle, somewhere in between.
You have to obviously figure out what you’re going to do with these.
Now, since we don't typically hold profitable positions, so any positions that hit our profit
targets early will close out of early in the expiration cycle.
And we don’t typically hold positions all the way through expiration to make the most
amount of money possible.
We’re definitely managing and closing trades early.
For us, this means that expiration week is when we have to make the close or roll decision
on trades that are on the fence.
Here are some things to consider the week of options expiration.
This is just some things to get the juices flowing here, things that I think about and
run through as we get closer and closer to options expiration.
Number one is “Can you take anything off that’s profitable right now even if it hasn't
reached your profit target?”
I actually want to jump over to our Thinkorswim platform.
Although it’s not the week of expiration, so just play along with me here and just realize
that we’re about 11 days out from options expiration at the time that we’re doing
this video, we’ve got a handful of positions that are still on that we haven't closed out
of and it's not the week of expiration, but let’s just assume it’s the week of expiration
or a day before the week of expiration, whatever the case is.
But this is a good example of where you have a position that hasn't quite met your profit
target yet.
For example: We sold a strangle in XLF and we sold each of these for $183.
They’re now worth $172, so we've made $21.
It hasn't quite reached our profit target yet, but if we were at the week of expiration,
we might want to consider closing that position because it’s profitable now, it hasn't quite
reached our profit target, but now that we’re at expiration, we don't want to run the risk
of something happening the last couple of days.
The same thing right here with OIH.
OIH is a strangle that we’ve sold for $529.
It’s worth $387, so we’re making some money on it.
It hasn't quite reached our profit target yet.
Maybe we go ahead and be a little bit more active and close out that position ahead of
expiration.
That's the first thing.
I always say really, you want to take care of your profits first and then manage everything
else.
What can you take off right now that hasn’t reached your profit target, but is profitable?
That would be the first thing that I always look for.
Number two is “Which positions have the highest risk of assignment, if any?”
If you are trading any position which has in the money options, you want to look at
those positions and manage the positions sooner that have the highest risk of assignment.
Now obviously, risk of assignment during expiration week goes up, but the options that are deep
in the money, so options that are really, really far away from the current market price
are at the highest risk.
If there’s like a level of risk, an option that say is just $1 in the money probably
doesn't have as high of a risk as an option that’s say like $5 in the money.
If we look at our portfolio right now, you can see here that if we’re looking at XLF,
XLF is trading at 22.62.
We have a short 21 call, so it’s about $1.62 away from being in the money.
I’d say that’s a fairly high risk of being in the money, but when you consider looking
at that versus something that we have in Qualcomm…
Qualcomm right now is at 50.82 and we’ve got the short 48 calls.
You can see that that’s a little bit further in the money.
It’s a little bit deeper in the money, probably a little bit higher risk.
Given the choice of which one to focus on, we might want to focus on closing out of our
Qualcomm position as opposed to doing something else.
Again, just look at where positions are.
Ask yourself, “Which options are really, really deep in the money?”
and start managing those positions maybe first.
Number three, “Which positions are on the fence and could quickly be either winners
or losers?”
Remember to think about Gamma risk here.
Remember that Gamma risk is going to increase as we near expiration which means that a trade
could literally move from being a full winner to a full loser within a couple of pennies.
That's how close and how high Gamma risk is.
Really, what you want to look at are trades that are really on the fence as you come towards
expiration.
And for me, that means that you're asking yourself, do you really want to gamble the
last few days of expiration and maybe risk $400 to make $400, but it’s a huge gamble
that last week of expiration?
We don’t have any positions that are like that right now that I could show you, but
it would basically be something that let’s say you have a 50 strike or a $50 breakeven
point and the stock is trading right now at 49.70.
If it trades over 50, you make $400.
If it trades under 50, you lose $400.
Is that the type of risk that you want to take the week of expiration?
Maybe you just close out that trade for a small loss, a small win, whatever the case
is, but I don’t want to risk or require the stock to move $.30 in either direction
for me to either made $400 or lose $400, probably not the type of risk reward that I want in
that situation.
My feeling is if something is on the fence and trading right around your breakeven point,
you're probably making a little bit of money, losing a little bit of money.
It's probably not worth the risk to carry that position and risk assignment and all
the other things that come with the last couple of days of expiration, so maybe close the
trade, have a small win, a small loss and move on.
Number four is “Can you roll or extend the trading duration or timeline on any of the
trades?”
We’ve obviously talked about rolling and doing this as part of this track here at Option
Alpha, so we won’t go over that in detail here.
but you just want to ask yourself what trades do you want to extend.
Do you want to extend any trades that have a short premium?
Can you get a credit for rolling that trade out and do you like being in that new position
over the new timeline?
That's some of the things you want to ask yourself.
Also take a look at any of your long option strategies.
Can you roll for no cost?
We will never roll for a debit on anything that we do, but we will roll for no cost.
If you could roll your trade out to the next month for no cost, you could do that.
For example: If we were looking at let’s say the IWM call debit spread that we have
here for the Russell, we basically bought this at 118.
It's worth 122, so we’re making about $9.
Maybe we wanted to roll this contract out to the next month.
Again, just assume here that there’s not 46 days to go.
I’m just trying to prove a point, so please don't add comments that say “But there’s
46 days to go.”
Let’s assume it’s the week of expiration.
If we want to create a rolling order to roll this contract out to the next month, you can
see that if we got a credit or paid no debit, we basically extended our trading timeline
for free.
Maybe that's a good thing to do with the debit spread, but generally speaking, we never want
to pay money to roll the contract out to the next month.
We always want to be in a position where we’re taking in a credit to roll positions out to
the next month.
Number five is “Are there any adjustments that you can make that dramatically increases
the chance of making a profit or reducing risk?”
And the reason that I highlight it dramatically here is because that's really what it needs
to be, is that we’re not looking to make adjustments the week of expiration to cut
a $200 loser down to a $190 loser.
That’s not what we’re looking for.
We’re looking for any adjustments that we can make, rolling contracts closer, protecting
ourselves, hedging a position, creating an iron condor out of a basic credit spread,
anything that we can do that dramatically reduces our risk or increases our chance of
making a profit.
If it doesn’t dramatically reduce…
And dramatic I know is a very fluid term.
For somebody else, a $50 reduction in premium might be dramatic.
For someone else, a $5,000 reduction in risk might be dramatic.
But just think about how much risk you’re really taking to put on that new position
to make that adjustment.
If it really, really helps, if it definitely, absolutely, emphatically helps reduce risk
in your position, great, then make it be in that trade for the next two or three days
because that’s really all you’re going to have the week of expiration.
If it doesn't or making an adjustment doesn't help, then again, you just need to consider
closing or rolling the position.
Generally speaking though, like we said, we want to let positions work as long as possible,
so that the probabilities have a chance to work out over time.
But of course, as always, we want to focus on controlling your risk and focus on the
extreme ends of the spectrum first.
What I mean by that is focus on things that are profitable first, so take those off first,
then focus on things that are losers, meaning deep in the money or at assignment risk, manage
those positions and then what you’re left with are things that you can manage day by
day which is everything in the middle, so things that are on the fence, things that
you could extend or roll, you just haven't been able to get fills in.
But definitely work those two extreme ends of the spectrum first, profitable trades and
then trades that’ll ultimately end up being losers.
Get those ones taken care of and then try to manage everything else in between.
Hopefully this little will five step checklist helps you out with expiration week.
I know there’s a lot going on, but if you continue to trade the system the way that
we’ve been coaching you and showing you here on Option Alpha, you’re definitely
going to have opportunities to close out trades at a profit and you’ll definitely have every
single month a couple of losers that might go against you, but it’s managing those
trades early in the expiration cycle that really makes the difference, not letting everything
go all the way to expiration.
Thank you so much for checking out this video.
If you have any comments or feedback, please let me know, add them in the comment section
right below.
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