When pundits talk trading ideas, the topic is usually focused on setups, and rarely about what to do once you are beyond the setup; and so you’re left in a position riding your trade with reckless abandon. When in fact, the management of your trade is without question the most important aspect of your trade. And it’s all about risk management.
It’s the same with stocks as it is with options, only there’s a bit more to know and understand with options. The biggest concern with options is getting assigned…that is being forced to take a position in the underlying stock that you don’t want, or may not be able to afford. So, if you don’t want to get assigned stock, then you need to know how to avoid it.
The easiest way to avoid getting assigned is to close your position before expiration. The alternative is to inform your broker whether or not you want to exercise your option. But there are other options…
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Rolling With the Ages
Expiration is not necessarily the end game to your position, in fact if you are profitable, or you run out of time with expiration nearing, then you can simply jump ship, and roll to another option.
You can roll at any time, no need to wait for options expiration. In fact you should be rolling at an opportune time, when you can lock in profits and move to an option that affords you a better position.
When rolling a long call or put, your are doing so with the expectation that the stock has not yet finished moving in the intended direction, and so you want to keep on profiting…so you bank your profits and use the your original capital to buy another option with an expiration sometime in the future.
In addition to getting an expiration that is further out, you could also “roll up” your call to a higher strike, or “roll down” your put to a lower strike. It’s a trailing stop on steroids.
Close As In Hand Grenades
If you choose to hold your position to the bitter end, just remember, if you are well out of the money, don’t sweat it, just walk away…your option is worthless. If you are in the money, OR, if you are very close to in the money, you need to decide to call your broker and discuss your exercise options.
The reason you need to call the broker when close, is due to the probability that your option may quickly jump to in the money as the expiration clock ticks down. There could be a Gamma Impulse that could launch your option from OTM to ITM in a flash, and so if you don’t have things pre-settled, you could get more than you bargained for.
If you get assigned, and don’t have the capital to cover the stock you now own, you will get a margin call, meaning you must liquidate positions, and perhaps come up with cash if you want to keep your account active.
Come Monday morning you might get a nice little surprise, and this could go in your favor, or go horribly wrong. And that is something called a Gap Risk. If the stock gaps in your favor, you may be spared coming up with the extra cash. If it gaps against you, a sizable position could easily blow up your account.
It’s your choice, decide wisely.