Last Week of Options Expiration Adjustments

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Options expiration: Tonight, I want to go over all of the trades that we made over the last two days because we didn’t have a chance to get the video update out for Friday of last week to wrap up our trade in BBBY which was an earnings trade, and then also an adjustment in GILD. Those two trades were on Friday, and we’ll start with those. With the earnings trade in BBBY, we were able to close this thing out early right after the open and save a little bit of profit.

As you notice, we’ve sold the 85 call above the market, and the 74 put on the market. We bought it back right after the open, probably about 5 or 10 minutes after the open for a $50 debit. And although it was a small little winner, about a $22 winner, what’s crucial about this is that you can see that after the market had opened, BBBY continued to move lower. And it moved lower today which is Monday, the 12th of January, but it continued to move lower.

And it's really important with these earnings trades that we close out the trade right at the market open or very soon after the market open because at this point, what we’re trying to do is just take advantage of this drop in implied volatility and that's exactly what we wanted to see, and we got it right away. And we can’t be greedy and try to get the whole thing out of it as much as we can, but at that point, we had a nice little profit, we didn’t want to see it evaporate which it would've at the end of the day, and we just need to go ahead and close the position.

Today which is January 12th, Monday, we did close out some trades as we head towards expiration. The first one that we closed out of is our calendar in EWZ. This was the February, January contracts targeting just the 39 strike calls, so we're looking for EWZ to move higher as we head towards the end of January expiration.

And you can see that it really hasn't done that at all, so we were looking for EWZ to be in this range up here around 39 and it just really never materialized and never really got up there, so we ended up closing the trade, just saved whatever money is left in the trade, that $.30 credit because the front month option is these January 39 calls that we sold, basically worthless, so at this point, we’re just long February 39 calls and that's not the position that we want to be in.

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For our other two trades, both of these were these custom iron condors in DIA and SPY. Now, we got into both of these trades when the market was dipping lower. And you’ll notice that with both of these even if you go back to the video updates, that we had sold the front strike at the same strike price on both the call side and the put side. You can see with DIA; we sold the 170/175 call spread, and with the put spread, we sold the 170/165.

The front two strikes were the same, and that gave us more or less a butterfly type pattern over the market. But it was just called an iron condor because we have puts and calls versus just using all one sided calls or puts. And we did the same thing in SPY. When we entered the trade, we did the 200 strike that was our middle strike for SPY and DIA. That’s ideally kind where we want the stocks to move to. Now, we closed out both of these trades very soon after the open today.

And looking back on it, hindsight is always 20-20. We could've obviously waited just a little bit longer to see stocks move down towards the end of the day, but we didn't see that at the market open. And with these positions already in the money and we’re in the last week of expiration, we run a high risk of being assigned the underlying shares. At the end of the day, they could've materialized into either a smaller loser or a bigger profit on the SPY.

But like I said, we exited the close right after the open market right about here, so we didn't know if the market was going just to rally higher and kick start the new week here. We wanted to be conservative with the trade. It just really hadn’t worked out the whole time. It gave us one opportunity earlier in the cycle, but other than that, it hasn't given us too many opportunities to close this thing out at a winner. For both the iron condor in DIA, we took a $60 loss, and then for SPY, we were able to close it for a $4 profit, so a small profit on that one.

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Alright, let’s talk about hedge trades. The first one that we did is GILD. Now, this was on Friday of last week. This trade was on Friday; we just didn’t have a chance to cover it in the video update, and that’s why we’re covering it tonight. What we did with GILD is that as the stock has continued to move higher, we again sold another put spread against our position.

And all we’re trying to do here by selling more put spreads is use this credit here, this $81 credit from the 195 put spread to help move out our breakeven points and reduce risk. When we go to the chart here of GILD, you'll see that the stock has just continued to go against our position higher and higher and higher towards that one side of the trade. And what we wanted to do was continue to sell put spreads against that position just in case the market did continue to move higher.

I'm going to take off the 195 put that we sold. This was our original position in GILD. This was our original iron condor that we’re left with. We had added a put spread before, so we’re left with this two stair step iron condor if you will that's on the market right now. GLD has continued to push the envelope against our call spread, so what we decided to do was to add another position right over the market, be super aggressive taking in more credit, and that credit then moves this breakeven point out further and also moves up our max loss that we could take on this position.

Again, with adjustments, you’re always looking to reduce loss. That's the whole point of making an adjustment, is to minimize loss. If you keep an opportunity for a profit, great, but at this point, we just want to reduce or minimize our loss. When I add that position in, now you can see what the new position looks like. It sounds like a butterfly right over the market, and it’s working out okay because GILD was down a little bit today.

As long as it finishes the week somewhere between about 97.5 and 102.5, we stand to make even more money on the trade than we had originally thought. It’s working out pretty good in our favor, and you can see that by making this trade, it moved out our breakeven point even further to the right of where GILD is trading right now. That's the adjustment in GILD.

We did the same type of thing; only it was the first adjustment that we’ve made to our TLT which is a bond trade in January. We went ahead and sold the 130/128 put spread. We sold the 130 strikes, bought the 128 strikes, took in a $.39 credit. That helps move out our breakeven points and helps reduce risk. And if we go to the trade here and we’ll take off the February position because we do have a February position, but we just want to look at that January position, with the put spread, we did the 30 and the 28.

This is what our original iron condor looked like with no adjustments. This is premarket today, and you can see the stock is trading all the way up here at 132. It’s not helping us by having this position here, especially as we get towards the last couple of days of expiration. What we wanted to do was move this side up and slide it higher to take in more credit, and that’s going to allow us then to move out our breakeven point closer to the market and just give us a better opportunity to make some money.

If nothing else and TLT continues to move higher for the rest of the week, it's also going to move up our max loss should TLT move higher and we take a loss on this trade. We're trying to reduce risk first and then leave an opportunity to make some money. Alright, here's the adjustment and you can see what it looks like. Now, you can see that we still have an opportunity to make some money if the stock moves down, but we have moved up this side and added this put spread, and you can see this reduced our loss by about $40 on each of these contracts just by doing this.

TLT is still not as favorable, but at least it reduces our loss. We might be able to do it one more time tomorrow just depending on where bonds go. But more or less, we’re going to leave this trade to go all the way to expiration. We could make about $200 if it backs down just a little bit and we could lose about $200, so it’s a pretty fair risk reward for the last week of expiration and we’ll leave it on and see what happens.

Alright, those are all the trades that we made, both on Friday and today, Monday, January 12th. As always, if you have any comments or questions, please add them right below this video. And happy trading!

About The Author

Kirk Du Plessis

Kirk founded Option Alpha in early 2007 and currently serves as the Head Trader. In 2018, Option Alpha hit the Inc. 500 list at #215 as one of the fastest growing private companies in the US. Formerly an Investment Banker in the Mergers and Acquisitions Group for Deutsche Bank in New York and REIT Analyst for BB&T Capital Markets in Washington D.C., he's a Full-time Options Trader and Real Estate Investor. He's been interviewed on dozens of investing websites/podcasts and he's been seen in Barron’s Magazine, SmartMoney, and various other financial publications. Kirk currently lives in Pennsylvania (USA) with his beautiful wife and three children.