Thank you very much my pleasure for the quick response Mark. Very
informative and now I'm aware of the risks :) I have a
friend who always dissuades me from covering out of the
money options for a nickel or a dime as he says they all add up.
He is correct. They do all add up, and over time
you can spend a bunch of many covering these 'worthless
options. But, it only takes one disaster to wipe out
all those nickels you saved. Assuming your commissions
are not a consideration (they should not be), then I
strongly recommend covering early. But the bottom line is
that this is a personal comfort zone decision. If you are
ok with going for the last penny, how can I tell you not
to do it? I just know waiting to the end cost me huge money
in my early days as a market maker, but closing early saved me
quite a pile in more recent years.
This is a guy who tries to close out in the money
options he sold by buying/shorting a stock in the last
couple of minutes before the end of the trading session as
he doesn't like to pay the mms the option spread by closing
out the option positions. It has always worked out for him
in past as the in the money options he sold seem to always
get exercised and so the underlying he bought/shorted gets
neutralized. However recently his in the money options
didn't get exercised and he was left with some stocks he
bought to close out his in the money calls... Would you say
his strategy is a risky one?
Yes. It's basically a continuation of his penny-wise,
pound-foolish strategy. I'll agree that when the stock
is significantly ITM, and it's very late in the
trading day, then using stock is fine. But when the
stock is within a couple of dimes of the strike, you never
know the price of the final tick. Nor can you be
certain that options ITM by a few pennies will be
assigned. It makes senses for an individual investor to
tell his broker to allow those options to expire
worthless and thus, when short these options there is the
possibility of not being assigned. Yes, the MMs don't get
his nickel or dime, but he has dollars at risk by holding
over the weekend. I'm a believer in frugality, but that
doesn't mean you must seek to save every penny possible in
exchange for taking on more risk than is reasonable.
Another hypothetical: say I bought $40 calls and the stock
closed at $39.95 on options expiration day. Right after
market closes, the company comes out with some good news and
the stock spikes to say $41. I could short the stock at $41
(assuming my brokerage allows me to trade in the first
fifteen minutes after market closes which mine doesn't) and
immediately call the brokerage to exercise the $40 call
before the 4.15pm cutoff time correct? Yes. Yes Yes. If your
broker does not allow trading stock during that time
slot, ask them to allow it, or find another broker. Your
hypothetical will not occur often, but to be barred from
taking a lay-up profit is absurd. 4:15 seems a bit early
to me, but the broker can choose it's own time.
Thanks so much in advance for sharing your knowledge. It's
much appreciated. I plan to check out the books you have
written. Which one would you recommend for someone at the
intermediate level? Thanks again! The Rookie's Guide to
Options is the best of the three. The title may be
deceptive. I begin with the basics but cover, in detail,
material that goes far beyond the basics. It includes six
strategies, including iron condors and double diagonals.
You will not be disappointed.
Leo
Mark
PS I meant to say my friend's in the money options in the
past always got assigned not exercised as he's the seller
That's the normal expectation, but not 100% of the
time when ITM by a penny or two.
--
Mark D. Wolfinger
The Rookie's Guide to Options:
The Beginner's Handbook of Trading Equity Options
website: http://www.mdwoptions.com
blog: http://blog.mdwoptions.com/options_for_rookies
Free eBook: http://www.mdwoptions.com/freebook.pdf