Dear Michael: thanks for this interesting post which contains an idea for expiration trading that I had not considered before. Please allow me to restate and expand.
On expiration Friday, you appear to be saying that it makes sense to put on two legs of a conversion or reversal and either lock in the third leg at a profit after a favorable or, at worst, hold through the end of the day and exercise before 4pm Saturday. For example, you can buy the stock, and buy the puts. (Especially helpful if you have a slight upside directional bias.) If the stock declines, exercise the puts. However if the stock moves up later in the day, thenn you may be able to sell the calls for a risk free profit, having locked in the conversion. Is that basically right?
If so, why not do this as a box since margin requirements would be so much less? For example, start the position as a three legged box. With the stock close to 580, say, buy the 570 580 vertical call debit spread plus the 600 put (to protect downside risk). If the stock goes lower, sell the 580 put to lock in the box at a profit. If the stock goes higher, sell the long call at a profit and short the stock to lock in a reversal (although it's not clear if this would be at prices better than the market originally offered.
Perhaps a third trading strategy would be to buy at DITM gut strangle early on Friday morning. Then you can sell the short ATM straddle legs against the long DITM legs as the stock oscillates. Thanks very much, in advance, for your comments....
--- In OptionClub@yahoogro
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> Comments below.
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> From: OptionClub@yahoogro
> Behalf Of Jack
> Sent: Sunday, November 29, 2009 2:45 PM
> To: OptionClub@yahoogro
> Subject: RE: [TheOptionClub.
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> OK, so you're long 100 calls and the underlying trades up to 80.25. Your
> calls will be worth .25+. Why not sell the calls instead of selling the
> stock?
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> Mc -Because you get the same quarter lock PLUS 100 free puts by shorting the
> stock against the calls. (for those that can't see this , a long call plus
> short stock is synthetically a long put. In the example if the stock
> continued higher the long call would gain in value equal to the loss in
> value of the short stock and at expiration the exercise of the long calls
> would negate the short stock. Conversely that long call plus short stock
> means that below 80 the calls are worthless but the short stock gains value
> as the stock goes south. Thus, the synthetic equivalent of the long put.)
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> If the stock drops to 79.75 and your calls expire worthless, you are short
> 10,000 shares. What if it gaps up Monday (pin risk - cost me $4,000 one
> expiration L )
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> mc- you buy the stock back at 79.75 and lock in another quarter. If you
> don't buy it back for some reckless reason (why would you not buy back the
> short stock you sold for no risk at 80.25 with the stock now trading at
> 79.75?), you just exercise the long calls. There is absolutely no reason to
> be exposed to pin risk unless you are stubborn enough not to buy back shorts
> at expiration - or sell longs if you don't want to be exercised.
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> OK, so it drops to 79.75 and you buy shares - where's your protection? What
> if it continues to drop, 79.50, 79.25,..
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> mc- you don't need protection since you've just closed all your risk: sold
> 10,000 at 80.25 and bought 10,000 at 79.75. (i.e. you've just locked in
> $5000).
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> I can understand why stocks would close at the strike with the most options
> - when they had automatic exercise if .25 ITM. What effect has the penny
> exercise rule had?
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> mc- this is irrelevant. It's not the automatic exercise AFTER expiration
> that drives pin behavior. It's deltas PRIOR to expiration that professionals
> (and smart amateurs) are capitalizing on.
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> From: OptionClub@yahoogro
> Behalf Of mcatolico
> Sent: Saturday, November 28, 2009 9:09 PM
> To: OptionClub@yahoogro
> Subject: RE: [TheOptionClub.
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> For instance if I am long 100 80 strike calls on abcde stock and the
> underlying trades up to 80.25 with less than an hour or two to expiration, I
> will sell 10000 shares against those calls to lock in the quarter premium. I
> now synthetically own 100 long 80 puts. If my selling action (and if there
> are a lot of other open contracts at the 80 strike, the selling of many
> others) drives that stock back down to 79.75, guess what, I now buy 10000
> shares to scalp another quarter out of the market. Lather, rinse repeat, as
> the pendulum wobbles back and forth and the scalps get tighter and tighter
> to the point where I'm scalping 10000 shares for a nickel or ultimately a
> penny.
>
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