Options expiration used to occur monthly. Then, in 2005, weekly option expirations were introduced, followed by daily contracts in 2022. With more expiration choices, navigating options expiration intelligently is a critical skill for traders.
This week’s podcast explores the top 7 automated tips and tricks you can use inside Option Alpha to manage your portfolio near expiration. After all, if you plan on trading options, you need to learn how to manage expiration risk.
1. Adjust Exit Options near expiration
- Exit Options allow you to remove positions before they need to be dealt with during the week of expiration.
- Dynamically update Exit Options to adjust your criteria based on where the market has been and the amount of time left in the position.
- Set up an exit option to close trades at a 50% profit, and the bot will check the position every minute. You can even adjust the settings to take a smaller profit as expiration approaches.
- The goal is to remove the position with a profit, recycle the capital, and reset the timeline.
- Frequency of the adjustments will increase if trading is performed every week.
- Implementation and automation are easy, and this is a strategy that all traders should adopt.
2. Check the extrinsic value of your position's legs
- All options are a combination of extrinsic and intrinsic value. This needs to be considered when trading options before expiration.
- You can check your position's extrinsic value at any time, but is especially important closer to expiration (five trading days prior to expiration is a good benchmark to use).
- The misconception is that if options go intrinsic before expiration, they are automatically assigned; this is not the case.
- The lower an option's extrinsic value, the higher the likelihood that the contract will be assigned.
- Identify the option legs close to expiration that have little to no extrinsic value, which allows you to effectively assess the probability that the contract will be assigned.
3. Check the probability of short legs being In-The-Money (ITM)
- You can use Option Alpha to check the probability of a specific leg being ITM at expiration.
- Leverage math, data, and probability to effectively judge whether to hold the position or not. However, probabilities are not a guarantee and should be checked frequently.
- Set up a decision inside your bot that checks the short leg of your position and identifies the probability it will stay in-the-money.
4. Use SmartPricing (don’t use market orders!)
- Avoid using market orders as a strategy to exit your position near expiration. Market orders do not protect traders; they exchange the speed to get out, for the price at which you get out. Which means you're at the mercy of the market and could end up paying more than you want.
- Instead, use SmartPricing and defined, timed limit orders that automatically traverse for the full width of the spread.
5. Tag positions to analyze performance
- We just released a new feature that includes a powerful way to visually analyze your portfolios.
- One tip is to use position tags for more detailed analysis. You can tag positions directly in the Open Position action, so all trades of a certain type will share a tag, allowing you to analyze the results of specific positions.
- For example, tag short put spreads in an uptrend to compare them to short put spread positions opened in a strong uptrend.
6. Set up automated alerts for low liquidity exit conditions
- Spreads that are deep in-the-money and/or have low liquidity or wide bid-ask spread may have trouble filling. Bots won't close positions for more than the spread's width, and sometimes the market will try to charge you more than you need to pay.
- You can create custom notifications in your bots to automatically alert you of specific market conditions. This gives you time to adjust your strategy and exit the position before expiration.
- For example, you can check if a position is completely ITM and send yourself a notification that you may want to close the position manually.
7. Set up 'critical’ alerts for positions between strikes of a spread
- If the underlying stock price expires between the short leg and log leg of a vertical spread, you are exposed to increased risk, because you'll be assigned the short leg but the long leg will expire. The position would no have protection.
- Automation lets you send alerts to warn you of options that are between strikes near expiration, which ynables you to immediately adjust your strategy to avoid and manage excessive risk.
- Pro tip: use emojis and words that will grab your attention!
.png){kind=avatar}
