It is Options Expiration Week - and watch for ex-Dividend also!

by Wayne Ferbert on September 17th, 2013

This Friday is the last day to trade the regular monthly options that will expire on Saturday. So, its time to plan for rolling your protection and your short option positions.
Let’s start with the protection side. As a quarterly option, these are popular for the protection side of your collar – if you are a Buy & Hedge investor. The quarterly options (Mar, Jun, Sep, Dec) typically have the most volume and are created earlier for many underlying ETFs and stocks. So, since we like long-dated protection, we gravitate to these quarterly expirations.
One trick that I like to do: I will download a snap-shot of my portfolio this week so I know what my protections looked like before expiration. As of Monday, the expiring protections won’t be there. So, when I go to re-set the protections next week, I will have a snap-shot of what I had before expiration.
There are times like now that we have chosen to be closer to 70-80% hedged – and these quarterly expirations give us a good chance to re-visit those decisions since we have expiring positions anyway. Also, we like the idea of purchasing the protections next week. For some positions, new quarterly options will be created for a quarter that doesn’t have any yet. For example, the June or September 2014 options may finally appear for sale next week. These will provide more flexibility.
As for the short calls in my collar, things are a little more tricky. If you have short calls on ETF positions expiring this Friday, there is a good chance that those calls are in-the-money given the market run-up that we have had both in the last 4 weeks and the last 6 months. So, if your call is in the money on one of the popular ETFs we use on this site, then there is a chance that you will get assigned on that ETF come Thursday night.

Because many of the most popular ETFs will trade ex-dividend on Friday. So, the owner of the short call wants to qualify for the dividend payment. So, he will exercise to buy the stock – which means you have to deliver it. You will have the stock taken from you and lose the dividend. These popular ETFs include SPY, SDY, MDY, and all of the SPDR Select Sector ETFs (ie, XLP, XLK, etc).
To avoid this, you need to either: (a) close the call before Thursday close of trading; or, (b) roll the call forward to a future expiration date. Closing it is the easiest way to perform this trade. But you will then want to sell a new call next week.
Rolling it is a little trickier. Look for another quarterly option, we recommend –  maybe the Decembers. In addition, we usually recommend that you roll to a call strike that is Out-of-the-money. There will be a lot of temptation to roll to the same strike if it is in-the-money – which is effectively a bearish short-term bet on the market. We can’t say that is a terrible idea given the recent market recovery. However, we usually recommend that you don’t try to pick what the market will do in the short-term.
My one recommendation: if you try to roll the call out for one month only to an in-the-money strike, then pick one that has more premium than the dividend payment expected this week.  If you don’t, there is a good chance that the person that bought the call that you sold them will still exercise it Thursday night and trade the premium amount for the higher dividend amount – thereby making a tidy profit in just 1 or 2 days. Don’t get snagged by that trap.
Remember that the best laddered protection plans have at least 3 rungs to the ladder and look out at least 9-12 months in this low volatility environment. Good luck with your expiration planning this month!

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