OAP 070: How To Manage Trades During Options Expiration Week – Close Or Roll?

Download The "Ultimate" Options Strategy Guide


We’ve reached yet another options expiration week, which can sometimes cause many traders to freak out as they worry about positions that are still lingering in their portfolio. And with the deadline for expiration quickly approaching it's no wonder why many people are incorrectly managing trades with the fears of assignment knocking on their doorstep. Either rushing to close position that shouldn't be closed or waiting too long to act and putting them at risk of a massive "gamma move" in the underlying option's price.

Typically by the time we reach expiration week we've closed positions that hit our profit target and adjusted positions that have gone against us. But as we near the third Friday of every month, we have to come face to face with the realization that some trades just haven't worked out as we might have hoped. In today's episode, I want to help you create a checklist for deciding which positions to close or roll during options expiration week. In particular, I want to walk you through my thought process on which trades I focus on closing first and how I ultimately decide if a position should be rolled to the next expiration month.

Expiration Week Trading Tips

  • Inside of expiration week, most of the assignment that happens is towards the latter end of the week because there is still some extrinsic value or volatility value left in these contracts.
  • Even though you might have a position in the money, slightly or very far in the money, it does not necessarily mean that you will be assigned solely because it is expiration week.
  • As you enter expiration week, do not rush or panic. There is plenty of time and opportunity to adjust, manage, close, roll, or make the appropriate decision for your positions.

6 Step Expiration Week Checklist:

Step 1: Is your trade profitable?

  • If the answer is yes, the best course of action is to take it off the trade.
  • Most trades are short-premium, option-sellers.
  • Most of the time you should have an automatic closing order — if you sold an iron condor you would be closing it out at 50% of the credit that you received.
  • When you get to expiration week and the order has not been executed, it means you have not reached your 50% profit target yet.
  • However, if they are still profitable, even marginally, take the trade off and move on to the next one.

*If your trades are not profitable, continue on to step number 2.

Step 2: How bad is the position?

  • If the trade is not profitable you have to analyze how much money you are losing in that position.
  • Is the trade really close to profitability, or is it way off?
  • If the trade is way off, close the position or let it expire.
  • The further in the money the position is, especially with short premium trades, the more at-risk of assignment you are going to be because you have less extrinsic value.

*If you are close to profitability, move onto step number 3.

Step 3: Can you adjust the trade now to dramatically reduce the risk?

  • Can you do something to adjust the position in the current month that will dramatically reduce the risk for this month?
  • The key is that you have to be able to dramatically reduce risk, and increase your potential for success. However, this often does not happen.

*If you cannot reduce the risk, continue to step number 4.

Step 4: What does your portfolio need for the next month?

  • This is where traders often times fail.
  • Before making the decision to roll or close the contract, you have to look at your portfolio next month.
  • Most broker platforms gives you the ability to analyze your portfolio and specifically target different expiration dates.
  • Looking ahead to next month can help make the decision of whether or not you want to roll any of your existing positions to the next month.

Example:

Next month's portfolio is bearish with a lot of call credit spreads and you generally want to see the market go down the next month. It might be a good idea to roll some put credit spreads that are marginal, right now, to the next month to help give some balance. Put credit spreads are generally a bullish strategy, and if next month's portfolio has a lot of bearish strategies already rolling the contracts (if possible), might give the portfolio a little bit more balance next month.

Step 5: Can you roll the current position for a credit to reduce risk?

  • If you have a short premium trade, can you roll that trade for a credit?
  • If you can roll the trade for a credit, you are getting paid to extend the trading timeline and then you get more time for the market to turn around and become favorable.
  • If you cannot roll for a credit and it will cost you a debit to roll, you should not do it.
  • You do not want to pay for more time, because when you pay for more time you guarantee a greater loss for the next month if it does not turn around, which is not worth the risk.
  • Instead, re-set the probabilities and the trade if you cannot roll for a credit to start with a clean slate next month.
  • If you do want to continue the position and can roll for a credit, consider what you portfolio needs and then roll it out.

*If you cannot roll for a credit or adjust the position, continue to step number 6.

Step 6: Close out your strategy as strategically as you can.

  • Look at each individual leg that you have and find the most strategic way that you can close out of the position so that you either:
  1. minimize the loss/risk
  2. leave a little bit of value that is left that you can squeeze out of the remaining position.
  • Remove short options that are in the money first; these short options are always at risk of assignment first.
  • Then look to get out of any long positions that still have some value left in them — if you have a long spread that was part of an iron condor that has some value left in it, try to get some of the value by selling the option back into the market.
  • Next, leave on any legs that are out of the money and short that could decay a little bit more in value.
  • If you have an iron condor and one side of it is really being challenged, only close the one side that is being challenged or threatened and leave the other side on to decay and expire worthless if it is out of the money and far away. That side may have value left, so do not close that side.

*Strategically look at your positions and try to pick which ones you want to exit, individually.

Key Points:

1. You have to be aware of the gamma risk in expiration week.

  • This is the concept that pricing in options will move very quickly as the stock moves the week of expiration.

Example:

You have to be aware of this gamma risk, or this acceleration in pricing movement during the week of expiration. If your options contract that is 90 days out, it will not move much with the price of the stock because there is a lot of volatility and time decay built in. However, an option contract that is 3 days from expiration has no volatility priced in and no time decay priced in anymore. It will move based on the value of the stock; as the stock goes up, the contract goes up and will move rapidly.

As you get into expiration you could be in a situation where a 10 cent move in a stock could create the difference between a $500 profit and a $500 loss; it can happen that fast in some positions. So Therefore, make your decisions quickly during the first part of the week as to positions you want to take off that are profitable. Do not gamble with positions that are on the fence. Make a decision, work down the checklist, and get those trades off or out to the next month.

2. You have to be less aggressive in adjusting risk-defined positions.

  • When you have a risk-defined position, you can be less aggressive during the week of expiration because you have contracts on both sides, so it will not move around as much as the undefined risk positions.
  • Focus on the positions that could hurt you the most, that needs to be managed and given the most attention early and then work your way backward from there.

Option Alpha Podcast Show Notes[FREE Download] Podcast Show Notes & Transcript PDF: No time to read the show notes right now? We've made it incredibly easy for you to save time by giving you instant access to the complete digital version of today's show. Click Here to Download Your FREE Copy ?

Free Options Trading Courses:

  • Options Basics [20 Videos]Whether you're a completely new trader or an experienced trader, you'll still need to master the basics. The goal of this section is to help lay the groundwork for your education with some simple, yet important lessons surrounding options.
  • Finding & Placing Trades [26 Videos]Successful options trading is 100% dependent on your ability to find and enter trades that give you an "edge" in the market. This module helps teach you how to scan properly for and select the best strategies to execute smarter option trades each day.
  • Pricing & Volatility [12 Videos]This module includes lessons on mastering implied volatility and premium pricing for specific strategies. We'll also look at IV relativeness and percentiles which help you determine the best strategy to use for each and every possible market setup.
  • Neutral Options Strategies [7 Videos]The beauty of options is that you can trade the market within a neutral range either up or down. You'll learn to love sideways and range bound markets because of the opportunity to build non-directional strategies that profit if the stock goes up, down or nowhere at all.
  • Bullish Options Strategies [12 Videos]Naturally everyone wants to make money when the market is heading higher. In this module, we'll show you how to create specific strategies that profit from up trending markets including low IV strategies like calendars, diagonals, covered calls and direction debit spreads.
  • Options Expiration & Assignment [11 Videos]Our goal is to make sure you understand the logistics of how each process works and the parties involved. If you don’t feel confident in the expiration processes or have questions that you just can't seem to get answered, then this section will help you.
  • Portfolio Management [16 Videos]When I say "portfolio management" some people automatically assume you need a Masters from MIT to understand the concept and strategies - that is NOT the case. And in this module, you'll see why managing your risk trading options is actually quite simple.
  • Trade Adjustments/Hedges [15 Videos]: In this popular module, we'll give you concrete examples of how you can hedge different options strategies to both reduce potential losses and give yourself an opportunity to profit if things turn around. Plus, we'll help you create an alert system to save time and make it more automatic.
  • Professional Trading [14 Videos]Honestly, this module isn't just for professional traders; it's for anyone who wants to have eventually options replace some (or all) of their monthly income. Because the reality is that mindset is everything if you truly want to earn a living trading options.

PDF Guides & Checklists:

  • The Ultimate Options Strategy Guide [90 Pages]: Our most popular PDF workbook with detailed options strategy pages categorized by market direction. Read the whole guide in less than 15 mins and have it forever to reference.
  • Earnings Trading Guide [33 Pages]: The ultimate guide to earnings trades including the top things to look for when playing these one-day volatility events, expected move calculations, best strategies to use, adjustments, etc.
  • Implied Volatility (IV) Percentile Rank [3 Pages]A cool, simple visual tool to help you understand how we should be trading based on the current IV rank of any particular stock and the best strategies for each blocked section of IV.
  • Guide to Trade Size & Allocation [8 Pages]Helping you figure out exactly how to calculate new position size as well as how much you should be allocating to your each position based on your overall portfolio balance.
  • When to Exit/Manage Trades [7 Pages]Broken down by option strategy we'll give you concrete guidelines on the best exit points and prices for each trade type to maximize your win rate and profits long-term.
  • 7-Step Trade Entry Checklist [10 Pages]Our top 7 things you should be double-checking before you enter your next trading. This quick checklist will help keep you out of harms way by making sure you make smarter entries.

Real-Money, LIVE Trading:

  • IWM Iron Butterfly (Closing Trade): Exiting this IWM iron butterfly options trade gave us a $1,100+ profit after pinning the stock price one day before expiration at the peak of our spread.
  • CMG Iron Condor (Opening Trade): I just recorded my live trading platform (and real money account) as I walked through the process of entering a new iron condor trade in CMG stock. Inside you'll see me analyze, price and fill the trade in real-time.
  • APC Strangle (Closing Trade): Took about $150 out of this small APC strangle trade even after the stock moved completely against our short call strikes this month. But as always, implied volatility always trumps direction and because IV went down, the value of this spread dropped more-so than the impact of the directional move higher.
  • IYR Call Credit Spread (Adjusting Trade): This adjustment is good for 2 reasons. First, it reduces the overall risk in the trade if IYR continues to move higher. Second, it still leaves room for the stock to fall back down into our new profit window.
  • XHB Straddle (Closing Trade): We were able to bank a $120 profit early in the March expiration cycle for our XHB straddle with the stock trading right in the middle of our expected range.
  • AAPL Call Calendar (Opening Trade): Look behind the scenes as I use our new watchlist software to filter quickly and find this AAPL call calendar spread trade during overall low implied volatility in the market.
  • COF Strangle (Adjusting Trade): Here I recorded my live trading screen (and real money account) showing you the entire thought process we used to make an adjustment to my current short strangle in COF to reduce risk.
  • GDX Strangle (Opening Trade): With gold's high IV we are getting into a new strangle with a 70% chance of success and a decent credit for selling option premium.
  • IBB Iron Condor (Closing Trade): Today we're exiting an iron condor we traded in IBB for a $142 profit. Inside you'll see me analyze the exit price and fill the trade in real-time.

Thank You for Listening!

I'm humbled that you took the time out of your day to listen to our show, and I never take that for granted. If you have any tips, suggestions or comments about this episode or topics you'd like to hear me cover, just add your thoughts below in the comment section.

Want automatic updates when new shows go live? Subscribe to the Option Alpha Podcast on iTunes, Google PlaySoundCloud, iHeart Radio or Stitcher right now before you forget - it's fast and easy.

Did You Enjoy the Show?

Please kindly consider taking just 60-seconds to leave an honest Review on iTunes for The Option Alpha Podcast. Ratings and reviews are extremely helpful and greatly appreciated. They do matter in the rankings of the show, and I read each and every one of them!

Also, if you think someone else in your social circle could benefit from the topic covered today, please share the show using the social media buttons you see. This helps spread the word about what we are trying to accomplish here at Option Alpha, and personal referrals like this always have the greatest impact.

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.