Couldn't have seen that one coming with a crystal ball. As far as puts or calls, what I've been vastly more sucessful with for whatever end is stock picking, so calls are much more natural to me. As far as understanding my strategy, think European options, no early exercise. Essentially I'm cheapening the price paid of the intrinsic value of an ITM call which would have a far lower delta in relation to the OTM call, making a move against me in the underlying much less painful. I started a new job recently so I haven't had as much time as I'd like to tweak and tune the details, but it seems quite promising thus far if used correctly. I'll keep you guys updated. I was supposed to start a journal about paper trading intraday as I practice, no time for that either, work!
Hello, there is a potential source of problems with the strategy as described by the previous paragraph. Most brokers will require that you have enough money in your account (or enough margin) to buy the shares involved in the exercise of the contracts. So usually at the expiration day, if your contracts are ITM and you don't have enough cash/margin, your broker might liquidate (read sell) the contracts before they become a liability for your account. However not all brokers do that and you can be exposed to substantial risk if you don't sell your ITM options prior to the market closing. For instance, if you are ITM just by a few cents then your broker purchases the shares and then sells them at the open on Monday. The risk here is that the opening price could be lower than the closing price on Friday and you are in for a loss (it could be substantial too). Not to mention a 90 day account freeze. The best thing for you to do is to close the options and pocket your profits which arguably would be the same as if you had exercised and sold the shares in one step. Also it is a good idea to read all of the policies from your broker regarding exercise and assignment of options on expiration day.
<<< For instance, if you are ITM just by a few cents then your broker purchases the shares and then sells them at the open on Monday. The risk here is that the opening price could be lower than the closing price on Friday and you are in for a loss (it could be substantial too). Not to mention a 90 day account freeze. >>> Yep. And more to the point, if your broker was too busy to close down your position, because you didn't close it yourself when you should have,... chances are the reason your brokers margin dept didn't get around to closing your margined 10:1 or more over leveraged trade(s), is because there was some negative market event going on that day, which made them too busy to get to everybody. If that negative market event on friday was the reason they didn't get around to closing your trade, what do you think monday morning in the market is going to look like??? YIKES! Talk about a stressful weekend for you. And BTW, if the drop in stock monday is significant, not only could your account be wiped out, due to the massive leverage you are probably on, but you might end up owing the company additional money as well. Afterall, it was your responsibility to close the trade. So the issue of a potential 90 day freeze is the least of your problems. Not only could the 10:1 or greater margin leverage wipe you out, but you might owe the company additional money on top of that. Either way, you won't be trading for a while.... a much longer while than a mere 90 days.
Here is a whole list of articles about letting calls expire ITM: http://www.google.com/#sclient=psy-...gc.r_pw.&fp=4e2387b06e8bc6cd&biw=1005&bih=585 My bottom line is don't do it. I always keep control of the situation and close the trade on Friday before expiration.