It's Expiration Week in the Options Market!

by Wayne Ferbert on January 17th, 2012

It is expiration week in the Options market. As a Buy and Hedge investor, you need to be getting ready for expiration at the end of the week. What does that mean?

It means you need to identify the options that you have that expire this week. In particular, the options that are at-the-money or in-the-money need the most attention. If you are long a call or put that is in-the-money, you need to examine the costs of the exercise and get comfortable that you have that covered. If you don’t, then you want to consider rolling the option to a forward month prior to the expiration on Friday.

If you are short an option that is in-the-money, you will get assigned if it is still in the money at expiration. As you know from reading this blog, collars are one of the most popular ways to build hedges that Buy and Hedge recommends. Collars include at least one short option position – usually a covered call position if you are in a bullish collar position. The collar will regularly include selling calls in the next month that are out of the money to generate the premium to help pay for the cost of the put.

With the nice market move up in the last couple of weeks, you might have calls that are in the money or near-the-money. A look back at the expiration in December 2011 for some popular index ETFs shows the moves up in these indexes:

More than likely, when you were looking to sell the call in one month out from the December expiration date, you were looking in the 5-7% range above the trading levels on that date. Anything above these levels rarely has any time value premium left to collect. This means you might have some calls that you have sold that are at risk of being assigned. This means you would have to sell the underlying stock or ETF at the call’s strike price.

On Friday, when most of the time value is evaporated from the call, if it is still in the money, you will probably want to roll the call forward to avoid the assignment. However, at Buy & Hedge, we do recommend being patient and waiting until Friday.

There is a temptation to panic and roll these positions today. But it is only Tuesday – and a lot can happen between now and Friday. On our ETF positions, we’ll be holding on and seeing what the market does for the rest of the week for our collar positions.

Buy and Hedge is a disciplined process. You don’t want to look back and see you failed because you didn’t follow the discipline.


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