Exit Strategy for Naked Short Calls on Expiration

Suppose you sold a naked call at a strike price of 100. Today is the last trading day before expiration and the underlying stock is curretnly trading a little over $100, like $101. You don't want to get assigned over the weekend so you need to close your position by the end of the day.

The underlying may drop below $100 momentarilly during the day, but the call premium will respond much slower, so you can't buy back the call without incurring losses. If you buy the underlying at $100 or less if it hits that price for a short time, you will be hedged if it closes above $100, but if closes below $100, you'd have a long position rather than netural.

What'd be the exit strategy for this situation, using the fact that the low of the underlying stock is below the strike price?

Thanks.

 

This is the classic “pin” scenario. You already stated what you need to do by writing “You don't want to get assigned over the weekend so you need to close your position by the end of the day.” So that means you have to pay up and get out.

You can roll the dice and wait until the end of the day and if the stock is low enough you can buy the call back for very little money. Being short options and waiting over the weekend to see if you have stock or not is never a good idea and the small price you pay to buy it back is worth it.

 

Your primary concern should be further rise of the UL because you're naked and have sizable upside risk.

If buying the short 100 strike call to close will incur losses at 101, you would have had to have sold it for peanuts at a far lower UL price. If so, since this situation should have been addressed before the UL crossed over the short strike and you waited far too long.

If you're not taking the intial premium into account, then you have a modest loss or even a small gain. Do not fear taking small losses. Breakevenitis is a bad habit to get into.