Selling options before their expiration

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Holding an Option Through the Expiration Date

A stock option gives an investor or trader the right to purchase a stock at a certain stated price. This stated price is called the strike price. It does not matter where the actual market price of the shares currently sits.

The relationship between strike price and the current market price of a stock is a major determiner of the option value. If the stock price is above the option strike price, the option is “in-the-money” and exercising it will allow you to buy shares for less than you can on the regular stock exchange. However, if the stock is below the strike price, the option is “out-of-the-money.”

If the option is out-of-the-money, there’s no reason to exercise the option because you can buy the shares cheaper on the open market.

Approaching the Expiration Date

An option will have no value if the underlying security is below the strike price (in the case of a call option) at expiration. In this case, the option expires worthless and ceases to exist. When an option is in-the-money and expiration is approaching, you can make one of several different moves. For marketable options, the in-the-money value will be reflected in the option’s market price. You can either sell the option to lock in the value or exercise the option to buy the shares.

If your option is in-the-money at expiration, your broker will automatically exercise them, and you’ll have the shares in your brokerage account on Monday morning; for employee stock options, you must exercise in-the-money options before they expire.

The Rules

Holding an option through the expiration date without selling does not automatically guarantee you profits, but it might limit your loss. For example, if you buy a call option for stock A, which currently trades at $90, a decision has to be made as to whether to exercise the option at its expiration date, sell the option, or let the option expire. Let’s say the stock price goes up to $100 and the option cost is $2. If a decision is made to exercise the option, then the profit that would be made is $100 – $90 – $2 = $8.

Timing Is Everything

It is important to remember that some types of options permit the holder to exercise the option at specific times. An American-style option has no restriction. It can be exercised at any time between the purchase date and the expiration date. A European-style option, however, can only be exercised at expiration, and Bermuda options have specific periods when exercise is permitted.

If the decision is made to sell the option, then the profit made may be slightly higher. If the option is sold before expiration date, then implied volatility and the number of days remaining before expiration may increase the price of the option. Let’s assume that the price is higher by 10 cents. The profit made will be $10.10 – $2 = $8.10. The decision to sell the option assumes that it is in the money.

Short Positions Are Different

One scenario that calls for letting the option expire occurs when you are holding a short position on an option that is out of the money. If you are short a put option that is worth $2, closing the position will cost you $2 plus commission. However, letting the option expire will only cost you $2. In this case, no profit is made, but losses were limited.

Selling Options on Expiration Day: Get Paid in a Few Hours!

Do you want to learn how to sell call and put spreads on expiration day to get paid for merely calling a top or bottom for the day?

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This video shows you how Master Trader uses the chart patterns to sell Options/Spreads using Technical Strategies (MTS) with a huge probability of profit for regular income.

Options traders who just trade by the “Greeks” and are unable or unwilling to use technical analysis in their options trading are doing so without valuable information and will find this information quite eye-opening.

Why Sell Options on Expiration Day?

We generate weekly income from selling options and credit spreads that expire in hours, with no gap risk, profiting from rapid time decay for merely calling a top or bottom on a stock or ETF for the current trading day!

Weekly options expire every week – most of them worthless — and that makes them a great instrument for weekly income by selling options.

The S&P 500 ETF (SPY) even has multiple expirations each week, giving us more profit potential.

Because of the ease of the strategy and statistical “edge” that exists in selling options around compelling chart patterns, these trades are available in all market environments – trending, choppy, or even a volatile mess.

As options sellers, we take the buyers’ money and get “Paid” by simply making a prediction of where the Stock will NOT go by the end of the day.

For the educated trader, winning trades are systematic; for the uneducated, the educated are waiting to empty your pockets.

For the options trader that uses the Greeks without charts, those that do use charts are waiting to empty your pockets as well!

Selling Options Video covers:

  • Chart Patterns for Selling Options on Expiration Day and Why Sellers Have an Edge
  • Selling Options on Bullish and Bearish Turning Points
  • Selling Options on High Volatility News Stocks, Gaps and Post-Earnings
  • Checklist on Selling Options on Expiration Days

Learn how Master Trader Technical Strategies – MTS with Credit Spreads can make consistent money.

Access the Program that puts you on the Master Trader Income Path HERE

Master Trader and You Building Your Financial Future Together

Happy trading! If you have any questions or comments, please e-mail Greg Capra at [email protected] or Dan Gibby at [email protected]

Dan Gibby
Chief Options Strategist

Follow Greg on Twitter, YouTube, and StockTwits

Twitter: @GregCapra
Stocktwits: Greg_Capra

Selling options before their expiration

Trades on futures financial markets on the internet have expiration periods. A feature of options is their fixed duration, which is set at the time the trade is opened and cannot be changed later. The point of exiting the market is called the moment of expiration. That is when the trading outcome is registered based on the direction in which the price moved. However, the functionality on some trading platforms allows you to close trades ahead of schedule with partial registration of trading outcomes. This will be the topic of our article. We will consider the trading method of early expiration in terms of trading efficiency.

The sale of options before their expiration allows you to get part of your investment back. As you know, options trading is different in that profits do not depend on price fluctuations, only on the direction of the trend. However, with early expirations, the situation is different. A floating rate of return is set on trading platforms, and it directly depends on how far the price goes in the opposite direction from the forecast. Also, the time that passes since entering the market is taken into consideration. The more time, the lower the percentage. On average, it is possible to get 20 to 60% in returns when trades are closed.

This opens up new opportunities for traders. Special trading strategies have even been developed for early trade closures. This point will also be mentioned in our article. As for hedging and risk management, there are even more opportunities. The introduction of this functionality on options platforms has made this product more attractive to professionals who previously traded on Forex.

When is early expiration justified?

Unprofitable trades, the ones where the price goes in the wrong direction, always close. The functionality allows you to exit the market even if the situation is successful, when it looks like you’ll get a safe outcome for your trading operation. However, in this case, instead of a full profit (70-90%), you’ll only get 50-60%. The answer to the question above is obvious – an early unplanned exit from the market is justified in cases where it is obvious to the trader that they will not make a profit on their position. In such situations, it is more profitable to get at least a certain percentage of the investment back rather than losing 100% of the money invested, as will be the case if the trade closes normally within the established expiration. But it is worth noting that in practice, such situations do not happen too often.

We have already mentioned that there are special trading strategies based on early closure. The idea behind them is that the trader must simultaneously open two identical trading positions in different directions. Entry to the market should be carried out immediately before a jump in volatility. As a rule, trades are opened right before the release of key news. This is when activity on the exchange increases and there are sharp price jumps. The “Economic Calendar” is usually used as a news source for this.

Some time after entering the market, when it becomes clear in which direction the price will go in regard to the news, the unprofitable trade will close early with a return of part of the amount invested. And the profit from the second option will cover the losses on the first, and will even provide a certain profit. This strategy allows you to get on average about 20-30% of the total amount of money spent on opening the two trades.

However, there are also risks of leaving the market with zero profit and a double loss when both transactions close with losses. The thing is that when trading on the news, there may be short-term price fluctuations that do not reflect the global trend. And after 1-2 minutes the chart can reverse in the opposite direction. Therefore, in order to trade with profit on this strategy, the trader must understand fundamental analysis in order to more accurately predict market reaction to different events.

Effective ways to get out of unsuccessful trades

The risk management system in the field of options trading differs somewhat from the classic approach which is used on Forex and other futures markets. The option itself has limited risk, which under no circumstances can exceed its price. Therefore, when opening a trade, the trader must calculate all the risks in advance. This is the main principle of money management.

Early closure of a trade will allow you to return a portion of your investment only in the first half of the expiration period. And for the remaining time period, it is quite realistic that the situation on the market will change and the trend will reverse. This works for any expiry term – for 1-minute turbo options and also for transactions that last several hours. Therefore, it makes more sense to act differently in this situation. Without closing the first trade, we buy a second option in the opposite direction. And the expiration is usually the same. This ensures that at least one transaction will close with a profit.

“General Risk Warning: Binary options and cryptocurrency trading carry a high level of risk and can result in the loss of all your funds.”

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