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Options Trading

It's Just Before Options Expiration. What's Your Next Move?

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Mark Wolfinger helps a trader weigh the question of how to react as options expiration day nears

I'm catching up after a summer hiatus from my All-Star blogging and found an interesting question from TK maven Spshapiro. It's too late to inform his choice in advance for this particular trade - and I hope everything turned out well with that one! - but it did get me thinking. I thought maybe others might find the following scenario useful to consider. Spshapiro writes:


…as a seller of options, I’m not usually tempted to roll out.  I usually tend to sell on a day that the stock is getting a pop rather than a day like today where MSFT is just moving with the trend.  On days of when MSFT is taking off, the options premiums are the highest.  So I rather buy the call back now and wait for a better opportunity.


Hi SP,

Perhaps MSFT is an exception to the general rule, but the truth is that the prices of call options are NOT necessarily the highest when the stock is getting a pop. Many times the market does not believe that "stock pop", and the call options just don’t budge in price. At other times, the calls may be trying to move higher, but a pop in the stock's price results in an IV decline. That means the calls don’t move much, if at all.

Most traders think the best time to sell calls is when implied volatility (IV) is rapidly rising. (For more on this topic for those who don't know much about IV, check out Brian Overby's post What is Implied Volatility? Another good rookie read is Where Do Options Prices Come From?) I find that I can often sell OTM (out-of-the-money) index call spreads at a decent price on big down days rather than on big up days. (If you're not familiar with short call spreads, you can catch up on this trade's particular risks and potential rewards at In a nutshell, you'd earn a short call spread's max potential profit if you can keep the whole net credit received upon initiating the trade. Your max potential risk, meanwhile, is limited to the difference between the strike prices, minus the net credit received.)

You are clear about why you don’t like to roll, but keep in mind that when the stock is driving down, when IV is racing higher, and when the stock is ATM, that is probably the very best situation theoretically for rolling from the near-term ATM to the next month. Sure, you are likely to pay too much for the front-month, but the Sept options should be priced so well in this scenario, that you will likely be happy to collect the available premium for the spread.

(Again, for those unfamiliar with rolling options, you should read this post: How We Roll (Options).)

Obviously the above reflects my individual perspective, and I know that Spshapiro in particular has lots of options experience. Perhaps not rolling and waiting for expiration may turn out to be the best move for him. However, it’s too risky for me.


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