It is Options Expiration week - and Quarter end!

by Wayne Ferbert on March 13th, 2013

This Friday is the 3rd Friday of the month – meaning it is options expiration week! Traditional monthly options expire this Saturday and your last chance to close the position is Friday’s close.
Some important mechanics to consider this week:

1. Most of the largest index ETFs with options pay a dividend quarterly. Many of them have the ex-dividend date correspond with the options expiration Friday. That means that people will exercise ITM call options that expire this month on this Thursday evening. They will want to make sure to own the stock/ETF to be the holder of record before the stock/ETF goes ex-dividend.
Just as importantly, if you are short an ITM call that expires this Saturday, you will want to close out that position prior to Thursday’s close to avoid getting assigned and being short the ETF/stock. If you are short the ETF or stock going in to the ex-dividend date, you will be required to pay the dividend. That might be ok with you since the stock/ETF will likely decline by the dividend amount the next day. However, I have had that happen to me and had the stock go up in value the next day. The market could still send the stock up.
2. If you have still been selling OTM calls on a monthly basis in the near month as part of your collars, then you likely are in-the-money on those calls as we near expiration. You have a decision to make – roll it, close it, or get assigned and give up the stock/ETF. Most of you will roll it to a new higher level– or close and live to set another one next month. However, if you think this market seems over-bought at these levels, you could roll the call forward to a deeper in the money strike that represents where you would want to get long again. This would help you avoid the taxable event related to selling the ETF this month if you let it get assigned. And it would lock in these gains all the way back down to the strike level in the event of a pull back.
3. Lastly, we have been advising to lock up long-term protection at these historically low levels. Volatility is at its lowest point since early 2007. So, the cost of protection in options is at a historically low level as a percentage of the capital you are trying to protect. More than likely, you have some protection that expires in March. The quarterly options are popular for laddering protection. We recommend you go ahead and start buying your protection now before Friday’s expiration. We have been buying the replacements for our March protection for weeks now. These levels of volatility are just so low – you have to buy them now.

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