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

  • Option Order Execution Tips

    As a community of option traders, we all can relate to the occasional challenges of order execution. Best practices for avoiding errors as well as techniques for better potential execution will be the focus of this article.  Like countless others in the Steady Options community, I personally have traded thousands of option contracts over the last decade.

    By Jesse,

    • 7 comments
    • 600 views
  • What Trading Can Offer To A Newcomer

    For any first-time investor, one of the most important questions to ask is “why are you doing this?”. Getting into investment can be thrilling and open up new worlds for you, but it can also be draining both physically and emotionally, with long days and sudden market moves always a genuine risk.

    By Kim,

    • 0 comments
    • 101 views
  • Updated: The Performance Gap Between Large Growth and Small Value Stocks

    Eight months ago on July 21st 2020 I posted an article, The Performance Gap Between Large Growth and Small Value Stocks. Over the long-term small cap value stocks have outperformed large cap growth stocks, although not over more recent history.

    By Jesse,

    • 0 comments
    • 263 views
  • 6 Ways to Invest Your Money That Aren't Cash Savings

    It’s always a good idea to keep some of your money in cash so if there is an emergency and you need money in a hurry, you can access it without having to worry. However, cash savings are not your only option if you have money left over at the end of the month, and there are a lot of other options that could bring greater returns.

    By Kim,

    • 0 comments
    • 318 views
  • Jade Lizard Options

    The jade lizard is one of those bullish spreads with limited maximum profit, and no risk on the upside. It is a combination of a short put with a short call spread . The credit this creates is higher than the span of the spread. To set this up, two actions are required:

    By Michael C. Thomsett,

    • 0 comments
    • 546 views
  • Are Your Emotions Trying To Tell You Something?

    As a trader, you may find yourself frequently trying to ignore or rationalize emotions.  You may have even created your own “solutions” to manage them. You exit early to lock up profit and avoid a potential blow-up if the trade turns against you.

    By Jared Tendler,

    • 0 comments
    • 360 views
  • Stock Trading Basics: 5 Rules for Successful Stock Trading

    You might be a stock trader, or just interested in learning more about how to trade and make the most out of your stock investment. Regardless, successful stock trading is not that easy. You must first have the financial capital to start and a very great endurance for risks.

    By Kim,

    • 2 comments
    • 505 views
  • Hourly Financial Advice for DIY Investors

    A large percentage of the Steady Options community consists of do it yourself (DIY) investors who prefer to manage their own trading and long-term investing accounts. This is a great way to gain firsthand experience about how markets work, but at times it may be beneficial to get professional input on investing and other personal financial planning decisions.

    By Jesse,

    • 0 comments
    • 309 views
  • Seagull Spreads

    Some varieties of call and put spreads are also called seagull spreads. It is so called because it contains a body and two wings. If the body is short, the wings are long, and vice versa. This 3-contract strategy includes two calls and a put, or two pouts and a call.

     

    By Michael C. Thomsett,

    • 0 comments
    • 435 views
  • Are Hedge Funds Good Investment for You?

    Right now, people are feeling at a bit of a loss as to what to do with their money. Those who usually invest are probably well aware that the market is pretty tricky right now. During unprecedented times, there are often unprecedented outcomes when it comes to investments.

    By Kim,

    • 0 comments
    • 436 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