ITM Puts at Expiration

by Jay Pestrichelli on June 13th, 2012

As expiration approaches, it is important to remember what to do with those puts that may be in-the-money. This is probably the case for any positions established in the month of April and had short term protection i.e. June puts. This could be married put positions, collars or even spreads. If you find yourself in this situation you are faced with a decision. Are you sticking with your original outlook, despite the decline? Or are you willing to throw in the towel and accept the loss?

Either decision is acceptable and the fact that you were hedged takes some of the emotion out of the decision. Typically if nothing has significantly changed with your original thesis you will stick to the previous outlook. When that is the case the way to act is to take advantage of the hedge by using its profits to add more stock. In oth words, take the value of the put by selling it and buy more shares. Think of this as a way dollar cost averaging without adding more money to the account. Your average cost basis will be lower and you now have more shares for the rebound than you had on the way down. 

If some of the fundamentals that caused you to enter the position have changed and you no longer have the same outlook, it's time to sell. You will take the full loss on the stock position and the profits from the put. The cheapest way to do this is to exercise the puts. With one click you will deliver the stock to the seller of the put at the strike price and you will be in a cash position. However if there is some extrinsic time value left in the put, actually selling the put in the market can give bring a little extra income from the hedge. This will typically happen if the stock is right at the money.



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2 Comments

spida - June 15th, 2012 at 1:06 AM
What if your put is on an index option? Can you sell it before expiration?
- June 15th, 2012 at 2:24 PM
You can always sell an index option before expiration. Just remember that many index options stop trading at close of Business on the Thursday before the 3rd Friday of the month.

They are settled for cash at the open on Friday at whatever the index opens. So, don't wait until the traditional Friday expiration if you want to sell - you need to make sure you do it by Thursday.


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