In this post:

    • What does the 1:1 risk reward ratio mean?
    • Why do we typically use at the money options in our trading strategies?
    • What is one of our favorite trading strategies?

Here at Simpler Trading, we often get questions from worried traders about options expiration, and what it means for their positions, particularly regarding the possibility of assignment. This is particularly the case because as options traders, we typically utilize at the money or in the money options in our trading strategies.

Why do we do this? In money, and at money options offer far better delta and theta than out-of-the-money options do. What does that mean? Well, when you’re selling options, having higher theta means that you’re getting more bang for your buck. We don’t really like to sell options that aren’t worth much for directional and pinning plays. The ‘income trading’ style is one we know and love, and focuses on further out of the money options, but this is a completely different strategy than what we are discussing for options expiration. When we are trading in the money, and at the money options for directional and pinning plays close to expiration, our traders particularly love the 1:1 risk reward ratio that comes with selling at the money credit spreads. When you’re buying in the money options, they have a higher delta. We like delta .70 options, which are slightly in the money. This means that these options will move $0.70 for every dollar that the underlying moves, versus a possible out of the money delta .30 option that will only move $0.30 for every dollar the underlying moves. But, when you purchase options like this, it also means that they are going to be in the money! During options expiration, you’ll particularly see a fair amount of iron flies, butterflies and at the money spreads coming from our traders. And you guessed it, but most will have at least some of their strikes in the money. Bruce and Neil in particular love to pick a pin on the SPX and S&P futures. Either way, we are primarily looking to capitalize on theta decay this week, and our strategies reflect that.

Those are just a few of our strategies, but at Simpler Trading, we will always be trading in the money, or at the money strategies during options expiration. Of course, you can always exercise your options, or get assigned on purpose – but I’m not really going to get into those strategies because those aren’t strategies we utilize here. We prefer the leverage that comes with options, rather than stock, so typically, we always close out any options position that is in the money before it expires on expiration Friday. That being said, let’s dive into what it means for your trades when expiration Friday creeps up.

The Basics

  • If you aren’t sure if your option is in the money, or out of the money, and you don’t know the effects on your account at expiration, the best thing to do is just close out your positions before they expire.
  • We like the leverage options given us. We don’t typically get assigned, or exercise our options on purpose. For that reason, most of our traders will close out in the money options positions before expiration.
  • Getting assigned early on a short options position is rare, but it does happen. This is why we trade (and recommend) defined risk strategies, such as credit spreads, butterflies, iron flies, and iron condors, so that you can simply exercise your remaining position and exit. This is one of the main reasons we do not worry about assignments because we know we can simply exit the position using the other half of our position.

Any option that is $0.01 in the money, has the possibility of either being assigned or automatically exercised when the market closes on options expiration Friday. And just remember, with any defined risk options strategy (spreads, iron condors, iron flies, butterflies), even if you DO get assigned, never fear! You can exercise the additional options you own, exiting your position for the same risk/reward parameters you had when you entered the trade.

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