Expiry - the practicalities

Discussion in 'Options' started by Jackdaw, Feb 20, 2004.

  1. Jackdaw


    Can someone please explain the pro's and cons of allowing a short call to expire ITM.

    If, say, you have sold the Feb 100 calls as part of a wider strategy, and expiry looks like it's going to be at 105, what action do you take?

    Do you buy back before expiry to retain some degree of control?

    Do you let the option expiry ITM and let the broker handle the assignment?

    What are the pros and cons? Clearly if prices look like they are going to rise through the day it would be best to buy back. Likewise if prices are falling, hang on. But what else should I consider?

    Any comments (esp before tonight's expiry!) gratefully received.
  2. omcate


    If you do not buy back the naked calls, and the stock gaps up on Monday at the open(eg. short squeeze), you can be in trouble.

    If I wrote an uncovered call, which becomes deep in the money, I usually cut/hedge the losses by selling near the money Puts few days before expiration. For example, you may short the corresponding in-the-money Puts. Both positions will be assigned, and the net result is a cash balance. However, today is the third Friday of a month. It may be too late to employ this strategy, as there is little time values for the February options.

    Of course, your broker will love it, if you roll over the short positions.

  3. ktm


    By allowing exercise, you capture the spread that would have been lost by buying back. You generally get assigned for free depending on the broker, so there may not be a cost to acquire/short the underlying.

    Your answer really depends on what you want to do with the underlying and why you put the trade on. I sometimes sell naked puts or calls to establish long/short positions above/below certain levels. In those cases, I want the underlying.

    The relatively small amount you will make on expiration day from allowing exercise can be easily obliterated by the move Monday AM before you can get out - as omcate rightfully noted. So I think the question to you is if you really want to be short the underlying over the weekend and Monday morning?