Options Expiration Week - Some Reminders!

by Wayne Ferbert on September 19th, 2012

This Saturday is the traditional options expiration weekend as it is the Saturday that follows the 3rd Friday of the month. So, Friday is your last chance to trade out of any short options positions that are in the money - unless you are alright with getting assigned over the weekend.

But you might need to consider another factor when looking at your ITM call options that you are short: dividends!

This is a popular dividend month for some ETFs - namely the SPY and MDY. If you have a collar on those and expect to collect the dividend by holding on Thursday night (Friday is the ex-dividend date), then you need to look at the strike price you sold the call in the collar.

If it expires on Friday, then you will get assigned Thursday night if the call is in-the-money. The run-up over the last month since the last expiration would lead me to think that many of you might have calls just barely in the money, slightly in the money, or slightly out-of-the-money. But with the appreciation in the market over the last 4 weeks, it is likely a close call for many of you.

Tomorrow (Thursday), you'll need to monitor the market and look to roll those calls forward to make sure you collect the dividend - IF THE CALL IS IN-THE-MONEY. If the call is not in the money at the close of business tomorrow, then you should be ok. Just remember that you might be looking to avoid a tax consequence of a sale - because you want to own SPY or MDY for a full 12 months in your collar to get long-term-gain tax treatment.

Don't let yourself get assigned on Thursday night if you don't have to. Make sure to close out any calls that are in the money. Then wait until Friday morning and sell them again!

One other reminder: if you sold the month end calls on SPY (which we recommended earlier last month), you still face this issue tomorrow even though your expiration is next Friday. You will likely get assigned on Thursday night if the covered call is in-the-money - even though expiration is still a week away.

Close the short call position tomorrow before the market closes. That will make you the holder of record on the ETF at close on Thursday. It guarantees that you collect the dividend and avoid the taxable event. Then, on Friday, go ahead and sell the month end call again - or roll to a call that expires in October.

Just be smart - and make sure you don't end up with an unwanted taxable event. And make sure you collect the dividend - even if you need to discount it slightly by taking a loss on the call you sold. It is still a better trade to exit and re-enter on Friday!

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