What to do on option expiration???

[shooter]

Hi all

I am a newbie just got an internet trading account recently. I've got some questions about what to do on expiration. From my understanding, I cannot close out options on expiration to realize the profit (or can I?). I can either exercise or allow it to expire worthless.

Suppose I have an in the money put option on expiration. Do I actually need to buy the underlying share from the stock market and sell it to the writer straight away to obtain the profit? If so, it's very incovenient since I have to have the money to buy the undrlying share to start with. Similarly for in the money call option on expiration. Do I actually have to buy the share from the writer then sell it to the market straight away??

 

[moXJO]

Hi all

I am a newbie just got an internet trading account recently. I've got some questions about what to do on expiration. From my understanding, I cannot close out options on expiration to realize the profit (or can I?). I can either exercise or allow it to expire worthless.

Suppose I have an in the money put option on expiration. Do I actually need to buy the underlying share from the stock market and sell it to the writer straight away to obtain the profit? If so, it's very incovenient since I have to have the money to buy the undrlying share to start with. Similarly for in the money call option on expiration. Do I actually have to buy the share from the writer then sell it to the market straight away??

you dont need the money you have 3 days (T3)

 

[happytrader]

Hi all

I am a newbie just got an internet trading account recently. I've got some questions about what to do on expiration. From my understanding, I cannot close out options on expiration to realize the profit (or can I?). I can either exercise or allow it to expire worthless.

Suppose I have an in the money put option on expiration. Do I actually need to buy the underlying share from the stock market and sell it to the writer straight away to obtain the profit? If so, it's very incovenient since I have to have the money to buy the undrlying share to start with. Similarly for in the money call option on expiration. Do I actually have to buy the share from the writer then sell it to the market straight away??

Hi Shooter

If you are talking about American style ETO's you can close out at any time before expiry to realise a profit or loss.

Cheers
Happytrader

 

[sails]

Hi all

I am a newbie just got an internet trading account recently. I've got some questions about what to do on expiration. From my understanding, I cannot close out options on expiration to realize the profit (or can I?). I can either exercise or allow it to expire worthless.

Suppose I have an in the money put option on expiration. Do I actually need to buy the underlying share from the stock market and sell it to the writer straight away to obtain the profit? If so, it's very incovenient since I have to have the money to buy the undrlying share to start with. Similarly for in the money call option on expiration. Do I actually have to buy the share from the writer then sell it to the market straight away??

Shooter, you can sell your long options (puts or calls) on the open market up until closing time on expiry day. One of the reasons I sometimes exercise a long option is if the bid/ask of a deep ITM are very wide and where too much money could be lost in trying to get a fair price from the market maker.

Some option friendly brokers do allow you to exercise your puts without sufficient funds in the account and then give you some time the next day to sell the shares without incurring any penalties. How much time they give varies considerably between brokers.

Also, check on fees for exercising - some brokers are horrendously greedy with a high percentage fee on the share transaction, where as others such as OptionsXpress charge only a flat fee of $33 (last time I checked anyway!). Remember there are two share transactions when exercising - one when you exercise and the second when you close the share position.

I haven't done this yet in Oz options, but it you feel you need to exercise to get the full value of your option (taking fees into consideration), it may be possible to actually sell the shares the same day you order the exercise instead of waiting until the next day. You would definately need to talk this over with your broker as they may not understand how it works - or have rules preventing it - or whatever!

Very difficult today (and yesterday) as MMs are not quoting - not even on BHP, our most liquid optionable stock. They are not responding to quote requests and I believe they are supposed to respond to 80% of them. So it may not be easy to sell your put options on the open market today. If you do attempt it, suggest you put in a limit order rather than a market order!

If you decide to exercise, talk to your broker and make sure you know exactly their conditions, fees, penalties, funds required, how long you have to close the share position. Make sure you are well informed!

Hope this helps!

 

[noirua]

It is always best to ring up and ask the company secretary what the position is on expired options. Also check carefully all the paperwork you have received as quite often the answer is hidden there somewhere.

Some companies will sell your expired options and send you any sum due to you.
One company I held shares in did this on some occasions but not always.

AS my Nan used to say "You've got a tongue in your head, USE IT!"

 

[wayneL]

It is always best to ring up and ask the company secretary what the position is on expired options. Also check carefully all the paperwork you have received as quite often the answer is hidden there somewhere.

Some companies will sell your expired options and send you any sum due to you.
One company I held shares in did this on some occasions but not always.

AS my Nan used to say "You've got a tongue in your head, USE IT!"

This refers to company options, not ETOs as I believe the OP was referring to.

 

[shooter]

Thanks everyone they are very helpful!

OptionsXpress charge only a flat fee of $33 (last time I checked anyway!).

By the way I checked the fee. The standard rate of optionXpress is $2.80 per contract, subject to a $27.95 minimum per trade, plus ACH Fees. I also have an ETRADE account charging the standard rate of 0.55% of trade value, subject to a $44.95 minimum per trade,plus ACH Fees.

I did a little calculation and if I'm right, the ETRADE fee is only cheaper if the price of an option is lower than $0.51 and more than 16 contracts on the trade.

If you are talking about American style ETO's you can close out at any time before expiry to realise a profit or loss.

What about Eurpean style??? Can it be closed out at all????

 

[alphaman]

Very difficult today (and yesterday) as MMs are not quoting - not even on BHP, our most liquid optionable stock. They are not responding to quote requests and I believe they are supposed to respond to 80% of them.

That's what I find most frustrating with options.

 

[wayneL]

What about Eurpean style??? Can it be closed out at all????

European style options can be closed out at anytime, they just cannot be exercised before expiry.
(providing the MMs give you a quote... )

 

[sails]

...By the way I checked the fee. The standard rate of optionXpress is $2.80 per contract, subject to a $27.95 minimum per trade, plus ACH Fees. I also have an ETRADE account charging the standard rate of 0.55% of trade value, subject to a $44.95 minimum per trade,plus ACH Fees.

I did a little calculation and if I'm right, the ETRADE fee is only cheaper if the price of an option is lower than $0.51 and more than 16 contracts on the trade. ...

Yes, those fees are for trading options. However, if you did decide to exercise, then the fees in Oz are usually based on equity commissions. Eg 1 x BHP $36 put option = $36,000 in value of underlying shares - commissions for exercising are more likely based on that amount with Etrade rather than the option price as in their option commissions. Then you have to sell the shares again - so double that fee.

Gets a bit tricky as they all have different fee structures and the difference in fees for exercising can be considerable between brokers. I think the ones that overcharge hope newbie traders won't notice

 

[sails]

That's what I find most frustrating with options.

Unbelievable at the moment. I currently have a number of option positions in BHP and usually have little difficulty in adjusting them - MMs normally respond quickly to option quote requests if they aren't making a continuous market - but the last two days have been a nightmare as the MMs have mostly disappeared en masse and no response to quote requests. Very difficult to trade when one has no idea of mid prices. I have heard they are supposed to respond to 80% of quote requests - but totally ignoring them is unacceptable IMO.

I think my days trading Oz options are numbered... It's tough enough with the high fees here in Oz, data fees and slippage without having MMs disappear two days before expiry!

I mentioned in another post that my broker suggested emailing a complaint to the ASX and to get as many traders as possible to do likewise...

 

[moXJO]

Unbelievable at the moment. I currently have a number of option positions in BHP and usually have little difficulty in adjusting them - MMs normally respond quickly to option quote requests if they aren't making a continuous market - but the last two days have been a nightmare as the MMs have mostly disappeared en masse and no response to quote requests. Very difficult to trade when one has no idea of mid prices. I have heard they are supposed to respond to 80% of quote requests - but totally ignoring them is unacceptable IMO.

I think my days trading Oz options are numbered... It's tough enough with the high fees here in Oz, data fees and slippage without having MMs disappear two days before expiry!

I mentioned in another post that my broker suggested emailing a complaint to the ASX and to get as many traders as possible to do likewise...

I think the rise of cfd's have taken a good chunk out of the options market in AUS not as liquid as it once was.I use to call through to the broker I was using to get the price if it was not up on screen.

 

[sails]

I think the rise of cfd's have taken a good chunk out of the options market in AUS not as liquid as it once was.I use to call through to the broker I was using to get the price if it was not up on screen.

Yes, I did call my very helpful broker and they couldn't get quotes either from the MMs. They also called the exchange to find out what was going on but it would appear the ASX maybe powerless to enforce their own rules as nothing changed for a couple of days.

In 5 years of Oz option trading, I've not seen this happen for so many days and especially going into option expiry when there is usually an increase in liquidity - with BHP anyway.

I have zero tolerance for this sort of incompetency and consequently am in the process of checking out US options. Hopefully with so many exchanges over there, not likely to lose all the MMs together

 

[GreatPig]

An interesting comment in Guppy's newsletter this week:

We regret to inform readers that for all intents and purposes, the Australian warrant market is dead ... we see the market makers are generally the only people active in these warrant series. In some cases there are no bid or ask, or the spread is so wide - $0.01 buy to $0.12 sell in one warrant - that trading is madness.

He seems to be big into CFDs now, especially with the current volatility and lack of a trend.

GP

 

[wayneL]

I have zero tolerance for this sort of incompetency and consequently am in the process of checking out US options. Hopefully with so many exchanges over there, not likely to lose all the MMs together

The only thing you'll miss is the closer strike intervals.

 

[sails]

The only thing you'll miss is the closer strike intervals.

Thanks Wayne - I am considering GOOG to replace BHP. The $10 wide strikes on a $600 stock seems farily comparable to the $1 wide on BHP when also taking into consideration the 100 vs. 1000 contract size. Currently using the TOS demo then will trial live with a small account. I'm also interested to see how much slippage one loses with US options vs. Oz - hopefully there will be some improvement there as well as the cheaper fees. Anyway, will be an interesting exercise at least!

 

[wayneL]

Thanks Wayne - I am considering GOOG to replace BHP. The $10 wide strikes on a $600 stock seems farily comparable to the $1 wide on BHP when also taking into consideration the 100 vs. 1000 contract size. Currently using the TOS demo then will trial live with a small account. I'm also interested to see how much slippage one loses with US options vs. Oz - hopefully there will be some improvement there as well as the cheaper fees. Anyway, will be an interesting exercise at least!

sails,

Re the strike interval issue. You're probably aware that the index etf options such as QQQQ, IWM & SPY have $1 strike intervals. There is actually a whole bunch of sector, overseas index & commodity funds, all with $1 strike intervals... some with nice vol too. Check it out:

http://cboe.com/Products/OptionsOnETFs.aspx

 

[sails]

sails,

Re the strike interval issue. You're probably aware that the index etf options such as QQQQ, IWM & SPY have $1 strike intervals. There is actually a whole bunch of sector, overseas index & commodity funds, all with $1 strike intervals... some with nice vol too. Check it out:

http://cboe.com/Products/OptionsOnETFs.aspx

Thanks Wayne - was actually checking out the CBOE site today looking for info on NDX which I eventually found at CME.

It's not so much the width of the strikes - more how much the stock moves through it's strikes. I like to be ratioed slightly for protection (both calendars and butterflies), so some healthy movement often means being able to reduce the initial debit a bit.

After the limitations here in Aus for liquid options, it's a bit overwhelming with the choices in the US!

Have a small live account open now, so checking out real fills with one lots. Got a small live position on AAPL which got filled quickly near the mid point. Had trouble getting filled on GOOG - tried on several occaions, but couldn't get filled. Got as far as 80c higher than the mid price (on a 4 legged combo) - and that is much worse slippage than here on BHP (eg 8c). So cancelled the order and went looking for something else.

Have heard NDX is pretty good for butterflies and seems to fit some of the criteria I'm looking for. I have found out they are American style, but cash settled and looks like they settle on the 3rd Thursday of the month rather than the Friday. Have you traded NDX or know any more about them? Any traps for the unwary?

Here in Aus, I mainly traded BHP and occasionally the banks for calendars / butterflies as core strategies, depending on IV conditions - and then just adapted as necessary. With so many more choices in the US, plus good scanning software all for free, I expect there will be many more opportunities.

Just got to get used to the partial night shift - that's the toughest bit!

 

[wayneL]

Thanks Wayne - was actually checking out the CBOE site today looking for info on NDX which I eventually found at CME.

It's not so much the width of the strikes - more how much the stock moves through it's strikes. I like to be ratioed slightly for protection (both calendars and butterflies), so some healthy movement often means being able to reduce the initial debit a bit.

After the limitations here in Aus for liquid options, it's a bit overwhelming with the choices in the US!

Have a small live account open now, so checking out real fills with one lots. Got a small live position on AAPL which got filled quickly near the mid point. Had trouble getting filled on GOOG - tried on several occaions, but couldn't get filled. Got as far as 80c higher than the mid price (on a 4 legged combo) - and that is much worse slippage than here on BHP (eg 8c). So cancelled the order and went looking for something else.

Have heard NDX is pretty good for butterflies and seems to fit some of the criteria I'm looking for. I have found out they are American style, but cash settled and looks like they settle on the 3rd Thursday of the month rather than the Friday. Have you traded NDX or know any more about them? Any traps for the unwary?

Here in Aus, I mainly traded BHP and occasionally the banks for calendars / butterflies as core strategies, depending on IV conditions - and then just adapted as necessary. With so many more choices in the US, plus good scanning software all for free, I expect there will be many more opportunities.

Just got to get used to the partial night shift - that's the toughest bit!

As a general rule of thumb, spreads are tighter on the equivalent ETF. For instance you will get tighter spreads on QQQQ than on NDX, and tighter spreads on SPY than SPX.

Re moving through strikes, check out ETFs like QLD which is a leveraged QQQQ, or some emerging market funds like EEM, even some of the commodity based ETFs will move much like BHP. Even good old QQQQ or IWM themselves are as volatile as many Aussie blue chips.

Anyhoooz there for the taking if useful.

Cheers

 

[wayneL]

PS

Here is the CBOE page for NDX... and QQQQ for comparison.

http://www.cboe.com/Products/indexopts/ndx_spec.aspx

http://www.cboe.com/micro/ndx/qqq.aspx