SteadyOptions is an options trading forum where you can find solutions from top options traders. TRY IT FREE!

We’ve all been there… researching options strategies and unable to find the answers we’re looking for. SteadyOptions has your solution.

Should You Close Short Options On Expiration Friday?


Options traders spend a lot of time trying to figure out the perfect moment to open a trade; but little attention is devoted to the other side of the transaction. When should you close? This applies equally to long and short positions. However, one aspect of short timing concerns expiration Friday.

The best time to open a short trade is the Friday before expiration. With only one week to go, there are seven calendar days remaining, but only five trading days. With time decay accelerating rapidly, the typical option loses one-third of remaining time value between Friday and Monday in this crucial week.
 

One trading technique combines several attributes about opening and closing the short trade:

 

  1. Pick a strike at the edges of the trading range. Sell calls when price is at resistance or better yet, when it gaps through resistance. This is the most likely time for reversal, especially if price also moves above the upper Bollinger band. Sell puts when price declines to support or gaps below; again, if price declines lower than the Bollinger lower band, timing to enter is excellent.
     
  2. Pick a strike at or out of the money, but not too far out. Maximum premium will be earned when the proximity of strike to the current underlying price is close.
     
  3. Pick expiration one week away. Friday is the ideal day for opening a trade. Aim for a one-week holding period at the most but be willing to close any time in the coming week.
     
  4. Set a goal. Will you buy to close your short option when half of its value has gone to time decay? Or do you require 1 100% profit, meaning waiting for expiration? Without a goal, you have no idea when to buy to close.
     
  5. Follow your goal. When the option’s value has declined to the level you have identified, get out of the position.
     
  6. Even if you have set the goal for expiration, consider closing on expiration Friday and replacing the position with the following week’s expiration.

 

To this final point: Should you buy to close on expiration Friday?


In fact, there often is very little justification for waiting out expiration, even if that was your original goal. If the option is out of the money, it will expire worthless; if in the money, you risk exercise by holding on to the contract.


Buying to close on expiration Friday makes sense for many reasons. Even when the position is out of the money, what if the option moves just before close and ends up slightly in the money? It will be exercised. Because it was close to no value, this consequence of waiting makes the risk unacceptable. Closing and taking profits is the rational choice.


Another reason to close on expiration Friday is that it frees up your collateral to sell another option, one expiring the following Friday. This assumes that the six points listed above still apply. You must review the current underlying price and strikes, and check proximity of price to the upper or lower Bollinger Bands (or other signals you might prefer to use).


Also check momentum. Relative Strength Index (RSI) may be the most consistent and reliable test of coming reversal. Look fort movement into overbought or oversold, which confirm what you see in Bollinger Bands signals. Combine RSI with other signals as well, including volume spikes or strong candlestick reversals (engulfing, three white soldier or three black crows, morning or evening stars, hammer or hanging man, to name a few). The more confirmation you find for reversal signals, the higher your confidence is in the likelihood of reversal.


The strong reversal signal is likely to occur on expiration Friday, when option premium tends to peg to the underlying price, meaning it is likely to move to the closest expiration. This is one example of the option market’s influence on stock prices, but it occurs primarily on expiration day. Friday is an excellent opportunity to close a short position and take profits; and to then replace the position with the option expiring the following week.


If you do close the current option on Friday and replace it, what is the best timing? Some traders like to make decisions first thing in the morning; others prefer last-minute trading. But regardless of personal preferences, the best time to trade is when conditions favor maximum profit. If your short option is out of the money by mid-morning, get out while you can still get maximum benefit. Things can change rapidly; and on expiration Friday, a slow morning could be following by a volatile afternoon, including reversal of direction. This is where many options traders lose money. In hindsight, they should have bought to close before the lunch hour, but they did not anticipate losing the advantage they had being out of the money.


This is a problem that potentially recurs every Friday. Because prices change rapidly on this day, get out when you have profits. Fridays are unpredictable not only because of the option expirations, but also because the weekend can mean big changes. Traders want to close out positions rather than holding them open through the weekend, and this applies to both long and short equity positions, as well as options.


The next question is, when should you sell to open the new option? If the morning presented an opportunity to take profits, it could also present an opportunity to open a new short trade with a different strike. Base timing on Bollinger Bands if the underlying is volatile. Once you are out of the original position, you can time a new one any time you want – same morning, later in the day, or just before the close.
 

Timing. It is all a matter of when to take profits or cut losses, and when to replace the original position with another.
 

Michael C. Thomsett is a widely published author with over 80 business and investing books, including the best-selling Getting Started in Options, coming out in its 10th edition later this year. He also wrote the recently released The Mathematics of Options. Thomsett is a frequent speaker at trade shows and blogs on his website at Thomsett Guide as well as on Seeking Alpha, LinkedIn, Twitter and Facebook.

 

What Is SteadyOptions?

Full Trading Plan

Complete Portfolio Approach

Diversified Options Strategies

Exclusive Community Forum

Steady And Consistent Gains

High Quality Education

Risk Management, Portfolio Size

Performance based on real fills

Try It Free

Non-directional Options Strategies

10-15 trade Ideas Per Month

Targets 5-7% Monthly Net Return

Visit our Education Center

Recent Articles

Articles

  • The Big Loss

    At his blog, Joey offers his perspective on the top reason that so many trader wannabes are not, and will not, become profitable traders. His post is titled: Learn to Lose Money to Make Money. Here are the Excerpts from the blog.

    By Mark Wolfinger,

    • 0 comments
    • 260 views
  • ETF Vs. Stock: Note Down the Vital Points

    Today’s small investment can fulfill your dream of high living tomorrow. But investing blindly can make it reverse. We all want to get a high return on our investment. Stocks or ETFs can be the best option for you in such cases. The investment in stocks or ETFs is not very different except few noticeable points.

    By Kim,

    • 0 comments
    • 292 views
  • Considering Trading? Here Are Some Trading Options You Need To Know

    Whether you are considering dabbling in day trading or looking for a longer-term investment if you want to start trading it will serve you well to carry out a little due diligence in advance. There are a number of markets that you could use and understanding how each one works and what they are all about is key.

    By Kim,

    • 0 comments
    • 5,866 views
  • Why Should You Paper Trade Options

    In my previous article I shared some thoughts why I believe traders should start with paper trading before committing real capital. Not everyone would agree, but today I would like to share another article by a trader I respect very much. The original article was published here

    By Kim,

    • 0 comments
    • 295 views
  • Is Long Call Better than Bull Credit Put Spread?

    The trigger to this article was a question posted on the forum: "why we should use bull credit put spread when you can just long call they both have limited loss both in long call you have unlimited profit why limited it with bull put spread?" You can read the discussion here.

    By Kim,

    • 0 comments
    • 446 views
  • Strike Selection: A 'Sweet Spot' for Option Sellers?

    The words above are powerful because they're approach-agnostic. It doesn't matter if you're an old-school pit trader who swigs grit instead of coffee before the opening bell, or a Gen Y technocrat who codes trend-detection algorithms. All traders live and die by The Four Words. If you consistently buy low and sell high, then you will be profitable.

    By Kim,

    • 0 comments
    • 1,557 views
  • Post-Earnings Implied Volatility Crush

    Earnings crush is the fall in implied volatility after earnings is announced. Typically, earnings announcements cause the price of the stock to move more than normal. The move will have more effect on short dated expirations since the day of earnings large move has more weight than the rest of the days with normal moves. 

    By ORATS_Matt,

    • 0 comments
    • 352 views
  • Why Not to Hold Strangles Through Earnings

    In my previous article, I described a strategy of buying strangles a few days before earnings and selling them just before earnings. In this article, I will show why it might be not a good idea to keep those strangles through earnings.

    By Kim,

    • 0 comments
    • 387 views
  • How to Prepare for Crypto Downturns

    Most cryptocurrency owners skipped a heartbeat when the bitcoin fell to 50% from its all-time high. According to experts, such nasty downturns are natural, and the crypto market may witness such downturns now and then.

    By Kim,

    • 0 comments
    • 520 views
  • Tradier Brokerage Special Offer

    Tradier Brokerage is partnering with SteadyOptions to offer a special promotion for SteadyOptions customers: Open an account with Tradier Brokerage and get no subscription fees for 3 months, plus all ACAT fees will be waived. After opening an account, you will also receive 3 months of free access to TradeHawk, our full-featured customizable trading platform.

    By Kim,

    • 0 comments
    • 662 views

  Report Article

We want to hear from you!


There are no comments to display.



Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account. It's easy and free!


Register a new account

Sign in

Already have an account? Sign in here.


Sign In Now

Options Trading Blogs Expertido