Rolling on expiry day - thoughts?

to use a real life example (please advise if this isn't allowed and i'll edit) - my view on QBE (i could be wrong, form your own opinion first before you trade it!) is that it is likely to break to the upside of $16 in the coming months due to its US exposure and assisted by a deteriorating AUD/USD, but will likely have to test $16 for a while first - from 2009 thru most of 2011 it appeared well supported there so i think that may prove to become a support turned resistance level in the coming months.

to express that view, i bought may-july $16 call calendar spreads on QBE a few days ago, when the stock was sitting right on $16. my plan was to let the front leg go to expiry, then roll it to a june-july calendar spread, either by selling the june $16 calls if the may short calls expired worthless, or selling the june $16 puts if i got assigned and left with a short stock position (same thing anyway).

thru much of today it hovered around $16 - leaving me unsure of whether the may calls will get assigned and therefore whether i should be selling the june calls or the june puts.

of course it wouldn't be a problem if it's quite clear on expiry day whether the front leg is going to expire ITM or OTM, but today i felt it was iffy right up until the close. what do you do?

let the may contracts expire and wait until the next day to re-establish the calendar spread, once you know what you need to do? then you're sweating on dodging a gap down the next day if something happens overnight, though at least being +gamma will help a bit there.

or buy back the may calls on expiry day and simultaeneously sell the june calls? but that means crossing another spread and giving up the insane last day theta - i checked the market with about an hour till the close. the underlying was exactly $16 and the may $16 calls were 4.5/6.5c. you can't assume you'll get a fill at the mid, so you'd have to factor 6.8c as the cost to close out (with IB brokerage - i don't know if there's any better for ASX options?) obviously you won't get anything like that back from one day's theta on the june contracts a whole month out from expiry!

i seem to recall reading articles in the past suggesting that one is generally better off doing the latter. but i think they were based on US options, which would probably have much thinner spreads.

not a life or death situation. i let the may contracts expire (OTM as it turned out). i will sleep easy, and i will look to sell the june $16 calls tomorrow if the conditions suit. but i'm curious to find out, how do others approach this sort of situation, when dealing ASX options?

In the situation you describe my best thought is keep on watching it right up till just before the close, and only take action at the last minute. That way there is a good chance you wont have to pay a spread and commission and probably not much TV if you do.

If that's not possible and an hour to go is the last time you can take action, the most +EV route is to let it expire and see what happens (since it would be negative EV to pay the TV + spread + commission now , and the EV of being either long or short but not knowing which, however uncomfortable, is close to zero). However that route generally leaves you with more delta one way or the other than you wanted. If you can tolerate the volatility of the unwanted position either way overnight , maximise your EV and let it expire, If not, sell (or in this case buy) down to the point you can. Sounds like you took the former.

yep, that i did, i'd already decided to let it run to expiry - wasn't intending for this to be a "help what should i do" type thread as that probably isn't allowed, it was more a "what's your thought process in this type of situation", so i didn't post until after the close when my decision was already locked in.

have to admit i've got lucky with this trade so far. the may contracts were a few cents OTM at expiry (having spent a fair bit of the day ITM), and today was able to sell the june 16 calls when the underlying was 16.05 for a tidy premium.

normally i do let it run to expiry for the reason you described - you're coughing up too much theta/spread/commish by closing out, and i reckon over a fair sample size of similar scenarios, you're likely to come out ahead overall by letting the near leg go to expiry - whilst it could gap down, it could also hold firm/rally and you'll do well shorting the near leg the following day. but i suppose given the way the human mind works, you get hit by a single instance of a huge gap down the day after expiry in this situation, and you'll be closing out & rolling on expiry day the next 10 times such circumstances arise!

one problem with what you suggest though is that often the MMs pull their quotes a few minutes before the closing bell. so you can't depend on waiting right up until the bell to take action. (and also for those of us still working full time and trying to combine trading with that - sometimes you get distracted by actual work near the close and can't do that anyway! )

also sometimes, when the MM doesn't really want to deal that near to expiry, but they have to show the market something as part of their obligations, they will quote you a stupid spread in the final minutes (something akin to say 2.0/7.0c for 16 strike options with underlying at 16) and probably refuse to fill you until you hit the offer (i've never actually tried bidding into such as that to be honest, when i see a stupid spread like that i just say screw it, i'll take my chances with a potential assignment/gap up/gap down and hedge it tomorrow). so i think generally if you haven't decided which way to go by about 3:50, often the decision gets made for you!

for those who trade US options - is that less of a problem there? with minutes to expiry, are you more likely to see, say, something like a 2.0/2.5c spread for 16 strike options where the underlying is smack on 16?

Sharkman, I doubt the QBE is very liquid and wouldn't be much point in comparing it with the far more liquid US options. The less liquid it is, the more trouble you will have with MMs widening the spreads especially when they know you are running out of time or are desperate to do a deal - at least that was my experience.

Initially, I traded other stocks, but found I got too ripped off and came back to the likes of BHP and the big four with an occasional trade in WOW. Another reason why I prefer XJO options now as it takes much of the stress out of expiry being cash settled.

sails said:

Sharkman, I doubt the QBE is very liquid and wouldn't be much point in comparing it with the far more liquid US options. The less liquid it is, the more trouble you will have with MMs widening the spreads especially when they know you are running out of time or are desperate to do a deal - at least that was my experience.

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actually QBE has been ok these last few months, at least as far as width of spreads are concerned anyway. the liquidity is sufficient for me, i'm unlikely to deal more than 100 contracts on something like QBE. when i was looking to sell the june 16 calls yest arvo, the spread was 53.5/57.0c. could be a bit better, but not all that bad. i got filled at 55c, and was fine with that.

but yes i can see if someone wanted to deal 200 or 300 contracts, that probably would have required close to 3 levels of depth probably meaning a lower avg fill.

sails said:

Initially, I traded other stocks, but found I got too ripped off and came back to the likes of BHP and the big four with an occasional trade in WOW. Another reason why I prefer XJO options now as it takes much of the stress out of expiry being cash settled.

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you wouldn't include RIO in that group? my memory might be somewhat slanted as i've done well on RIO options this year relative to options on most of the other majors, but i seem to recall always getting filled near the mid, if not right on it, for RIO options. plus you don't need a whole lot of contracts to get decent sized exposure.

agreed with the others though, the 5 that you mention, plus RIO would be where the bulk of my trades go. definitely need to consider expanding my trading to include XJO options at some point. but sometimes i'll have a view on one of the smaller optionable stocks and enough conviction to want to trade that view, like with QBE here.

when you say you got too ripped off - by that do you mean you found the MMs were making you cross practically the whole spread before they filled you on anything that wasn't BHP or the big 4? or that there wasn't enough liquidity so you only got a partial fill at a decent price then they widened the spread and made it difficult to fill the rest?

Sharkman said:

actually QBE has been ok these last few months, at least as far as width of spreads are concerned anyway. the liquidity is sufficient for me, i'm unlikely to deal more than 100 contracts on something like QBE. when i was looking to sell the june 16 calls yest arvo, the spread was 53.5/57.0c. could be a bit better, but not all that bad. i got filled at 55c, and was fine with that.

but yes i can see if someone wanted to deal 200 or 300 contracts, that probably would have required close to 3 levels of depth probably meaning a lower avg fill.



you wouldn't include RIO in that group? my memory might be somewhat slanted as i've done well on RIO options this year relative to options on most of the other majors, but i seem to recall always getting filled near the mid, if not right on it, for RIO options. plus you don't need a whole lot of contracts to get decent sized exposure.

agreed with the others though, the 5 that you mention, plus RIO would be where the bulk of my trades go. definitely need to consider expanding my trading to include XJO options at some point. but sometimes i'll have a view on one of the smaller optionable stocks and enough conviction to want to trade that view, like with QBE here.

when you say you got too ripped off - by that do you mean you found the MMs were making you cross practically the whole spread before they filled you on anything that wasn't BHP or the big 4? or that there wasn't enough liquidity so you only got a partial fill at a decent price then they widened the spread and made it difficult to fill the rest?

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I never did try RIO, so don't really know on that one. I think I looked at it and decided there were not enough retail customers trying to trade so gave it a miss.

And, yes, I have had MMs make me cross the entire spread. It depends who is the most desperate to trade when it comes down to you and the MM. And they are rarely desperate...lol

After a few of these I actively avoided options when it was down to me and the MM. Entry to the position is OK as I could cancel if they were too greedy, but on the back foot when it's time to exit.

I once did an analysis of how much I would have given away in just giving up 2c on every option trade in a year I had done a lot of trading. It worked out to be about $50,000. So, I am very careful to protect that as much as possible.

Glad you have had a good run with the spreads though. Don't let my experiences put you off...lol

2c extra spread = $2 a contract so $50k = 25,000 contracts a year? wow - i'd probably only top out at 4,000, maybe 5,000 contracts a year, and that's counting each leg of a spread separately towards the total (as you'd need to do in this sort of calculation). out of curiousity are you a full time trader? would most people here be full time traders as well?

i can see how you might find insufficient liquidity for some of the smaller optionables like QBE and LEI, with the contract sizes you'd probably be doing with that sort of yearly turnover. those two would usually only have 50-100 contracts at the top level of the depth.

still think it's worth revisiting RIO though, even if you're doing large trades (in retail investor terms) i still think it's worthy of being included in the big six optionables. it might be different now than when you last looked at it. especially if you last looked at it in 2011 - it was up around $85 then and we still had 1,000 contract sizes in the early part of 2011, which would have driven off a lot of retail investors. i can't remember exactly what trading RIO options was like 2+ years ago (when i make a trade i do record why i got into it and what i'm looking for in terms of exiting, rolling etc., but not what the spreads were like or how easy it was to get the fill), but from recent memory it has been quite good, on par with BHP and the big 4 in my opinion, and possibly the switch to 100 contract sizes may have had something to do with that.

Sharkman said:

2c extra spread = $2 a contract so $50k = 25,000 contracts a year? wow - i'd probably only top out at 4,000, maybe 5,000 contracts a year, and that's counting each leg of a spread separately towards the total (as you'd need to do in this sort of calculation). out of curiousity are you a full time trader? would most people here be full time traders as well?

i can see how you might find insufficient liquidity for some of the smaller optionables like QBE and LEI, with the contract sizes you'd probably be doing with that sort of yearly turnover. those two would usually only have 50-100 contracts at the top level of the depth.

still think it's worth revisiting RIO though, even if you're doing large trades (in retail investor terms) i still think it's worthy of being included in the big six optionables. it might be different now than when you last looked at it. especially if you last looked at it in 2011 - it was up around $85 then and we still had 1,000 contract sizes in the early part of 2011, which would have driven off a lot of retail investors. i can't remember exactly what trading RIO options was like 2+ years ago (when i make a trade i do record why i got into it and what i'm looking for in terms of exiting, rolling etc., but not what the spreads were like or how easy it was to get the fill), but from recent memory it has been quite good, on par with BHP and the big 4 in my opinion, and possibly the switch to 100 contract sizes may have had something to do with that.

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lol - at that time it was 1,000 contracts per share instead of the current 100 - so it was $20 for a 2c spread.

The volume added up as I was doing a lot of spread trades (butterflies, condors, multi level calendars, etc) and a lot of adjustments. I did a lot of experimenting that year so it didn't take too long to run up a heap of trades. But it showed me to be very careful with slippage as it is just giving money away.

Each to their own - I have no desire to go back to Aussie stock options at this stage. I'm still fairly busy with a difficult family situation, so just monitoring the XJO is good for me at this time and having mobile IB is great when I have to be away from the PC at home.

sails said:

lol - at that time it was 1,000 contracts per share instead of the current 100 - so it was $20 for a 2c spread.

The volume added up as I was doing a lot of spread trades (butterflies, condors, multi level calendars, etc) and a lot of adjustments. I did a lot of experimenting that year so it didn't take too long to run up a heap of trades. But it showed me to be very careful with slippage as it is just giving money away.

Each to their own - I have no desire to go back to Aussie stock options at this stage. I'm still fairly busy with a difficult family situation, so just monitoring the XJO is good for me at this time and having mobile IB is great when I have to be away from the PC at home.

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fair enough, family should come first. best of luck & i hope it all works out well for you.
thanks for the discussion. you've given me a few things to think about. i might look into XJO options at some point, plus maybe when i'm recording my trade details i should perhaps try to include, as accurately as i can, how much of the spread i had to cross to get a fill. it could well be that i will get a rude shock when i see the amount lost over a year's trading to crossing spreads, discover that my memory has been horribly subjective and inaccurate, and that trading RIO options is a bad idea after all!

Sharkman said:

fair enough, family should come first. best of luck & i hope it all works out well for you.
thanks for the discussion. you've given me a few things to think about. i might look into XJO options at some point, plus maybe when i'm recording my trade details i should perhaps try to include, as accurately as i can, how much of the spread i had to cross to get a fill. it could well be that i will get a rude shock when i see the amount lost over a year's trading to crossing spreads, discover that my memory has been horribly subjective and inaccurate, and that trading RIO options is a bad idea after all!

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I wouldn't write RIO off if it's working for you. We all trade differently - there is no right and wrong...

my strategy for RIO over the past 18 months has been rather crude - but surprisingly effective. it's either elegant in its simplicity - or it's just a plain old lucky streak that will soon blow up in my face - i'm not quite sure which. though i suspect (to borrow a phrase from Michael Clarke after he took 6 wickets once) it's more **** than class! :

basically in a nutshell, all i've been doing in that time is - sell front month cash covered puts at 58 or 59 (whichever has better spread) any time it gets near 60. if it expires ITM - take the assignment. sell covered calls at 58 or 59 until called away. rinse and repeat. really simple and crude. like the QBE strategy, i based it around what i saw as a horizontal support turned resistance level, in RIOs case, around about 59'ish.

so at the moment i am long stock after getting assigned on the mar 59.93 puts (btw. i've never figured out why for some months the strikes go all funny in RIO - anyone know why that is? it's a pain in the butt as the lot size also changes to 126 per contract in those months!) and have switched back to covered call mode again - both the april and may covered calls expired worthless. haven't sold the june 58 calls yet, so i just have a straight long stock position right now. taking a punt on it rallying back to 57 or so - will sell the covered calls then.

so the stock has gone just about nowhere for the last year and a half, it keeps gravitating back to the 59'ish level time and time again. but RIO IV has been consistently decent, higher than the other members of the "big six optionables" for the last 2 years, allowing healthy premiums to be harvested. so i'm not bothering with spreads here - just looking to consistently collect premium. though i really ought to be thinking about what sort of signals i need to be keeping an eye out for that may indicate this strategy is no longer viable...

ah, there is censorship here. well i'm sure everyone can guess what the missing word was

sails said:

And, yes, I have had MMs make me cross the entire spread. It depends who is the most desperate to trade when it comes down to you and the MM. And they are rarely desperate...lol

After a few of these I actively avoided options when it was down to me and the MM. Entry to the position is OK as I could cancel if they were too greedy, but on the back foot when it's time to exit.

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Indeed! About the last person in the world I would want to trade against is an Aussie RT.

wayneL said:

Indeed! About the last person in the world I would want to trade against is an Aussie RT.

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Yeah they can be mean! I have closed entry orders on several occasions so they missed out by being too greedy. I would trade the US markets, but simply can't be up at night. I'm wearing out with the family situation here and need to get decent sleep at night, if I can.

So, XJO is not too bad and I don't want to lose the skills I have taken so long to learn. Still no where near as good as trading US options, but I try to time entries to favour a fill due to market conditions.

Sharkman said:

fair enough, family should come first. best of luck & i hope it all works out well for you.
thanks for the discussion. you've given me a few things to think about. i might look into XJO options at some point, plus maybe when i'm recording my trade details i should perhaps try to include, as accurately as i can, how much of the spread i had to cross to get a fill. it could well be that i will get a rude shock when i see the amount lost over a year's trading to crossing spreads, discover that my memory has been horribly subjective and inaccurate, and that trading RIO options is a bad idea after all!

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Ay shark. I've been trading the Xjo opt for the last 3 months. Probably placed around 40 trades. I only had liquidity problems once. Usually trade options that are above the $0.15 cent mark caus they usually have a midpoint, I aint like paying to much for my opt.

Qbe was a stock I was looking at straddling for the 2nd half of last year however I couldn't trade it. I needed a smooth consistent trend like mqg,ncm,wbc or Cba. Qbe did have that massive drop when the stock went into free fall. If I ad a position open I would av celebrated Christmas mid-year. Ahh well.

cbc said:

Ay shark. I've been trading the Xjo opt for the last 3 months. Probably placed around 40 trades. I only had liquidity problems once. Usually trade options that are above the $0.15 cent mark caus they usually have a midpoint, I aint like paying to much for my opt.

Qbe was a stock I was looking at straddling for the 2nd half of last year however I couldn't trade it. I needed a smooth consistent trend like mqg,ncm,wbc or Cba. Qbe did have that massive drop when the stock went into free fall. If I ad a position open I would av celebrated Christmas mid-year. Ahh well.

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i actually sold nov $11 ATM straddles on QBE last year. well technically i suppose it was a one winged iron fly, as i did buy some cheap way OTM calls to cover the upside. left the downside uncovered, was willing to take delivery at $11. 2 or 3 days after the bad profit announcement and hurricane sandy impact came out, the IV was still up around 45%, like it was before the announcement. i thought, shouldn't there be a vega crush by now? i got lucky. it closed on nov expiry day at 10.93. collected 40c premium on each leg - for about 2 weeks to expiry.

got lucky again after taking delivery. i was stopping out if it fell below $10. it got within a whisker of that before rallying. eventually i had it called away at $14 a few months ago after repeated covered call selling on the basis that i thought it would run into resistance at $14. and now i'm back on it with these call calendars. tempted to sell june puts at $14 on the recent downswing to potentially buy them back at the same price, but got too busy at work recently and couldn't watch the market properly.

QBE has been surprisingly decent in terms of spreads - IIRC the spreads were 39.5c/41.5c or so when i was selling those straddles. it was crap a couple of years ago but does generally seem to be better now. though liquidity may be an issue for those who want to trade >100 contracts at a time in it.

I'm also surprised that you didn't list tls in your stock choices for options,

One of their contracts has over 250,000 open positions

Sure, the stock is cheaper but still......

cbc said:

I'm also surprised that you didn't list tls in your stock choices for options,

One of their contracts has over 250,000 open positions

Sure, the stock is cheaper but still......

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TLS is too dollar cheap to make options viable IMHO - liquidity won't be a problem but spreads are too wide in a relative sense. for a 1 month ATM you'd typically see something like 9.0c/11.0c on TLS, but on an expensive stock like RIO a typical spread might be something like 1.64/1.72. yet both have a 0.5c tick size. so you pretty much have to get filled at the mid if you're trading TLS otherwise crossing the spread becomes too costly. whereas with RIO, it's usually not as much of an issue - if RIO was trading at a level i'd be willing to take delivery at, i'd probably be ok even if forced to hit the bid on the above spread to sell puts. TLS is even worse if you want to do a multi leg trade. plus, TLS generally has low IV leading to cheaper options that make the spread even more of an issue.

the other thing is commish, IB charge on a per contract basis. you'd need hundreds of contracts in TLS to get big enough exposure meaning the brokerage will add up. with RIO, just 20 is enough to give a decent sized exposure (for me anyway).

as such i prefer to trade options over expensive stocks, preferably with high IV. even QBE at $11 was pushing it, but the high IVs and decent bid/ask at the time made it good enough for me.

Sharkman - I like your thinking... I didn't trade the low value stocks for long for the very reasons you outline. Commissions and slippage are heavily magnified.

It sounds like you have a pretty good system, Sharkman. You would not be able to do the same with index options, so don't take any notice of me...lol

Sharkman said:

the other thing is commish, IB charge on a per contract basis. you'd need hundreds of contracts in TLS to get big enough exposure meaning the brokerage will add up. with RIO, just 20 is enough to give a decent sized exposure (for me anyway).

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Probably one of the only times that Comsec has it over IB in comish, what ur talking about. U could load right up to the fee cut-off limits and get a much better deal than IB......... There is obviously a point where comsec becomes less beneficial then IB.


Sounds like your a few steps ahead of me, I was / am with commsec + IB and I was going to transfer the rest of my $ over to IB next weekend, however I remembered when I signed up that comsec had a "inactive account" fee. How long had you left your commsec account open for without any $ in it?

Thanks