This segment is all about expiration and the topics covered include what it is, why it’s important, when it is, how it works and what we need to do. New traders need to know this information and veteran traders need to be reminded about it.
First explained is what expiration is. That naturally leads into why it is important and touches on what we have to do.
When expiration occurs is discussed next. Normal equity options expire on the third Friday of the month. Futures and options on futures have differing rules. Every trader who trades them absolutely needs to know them.
An important question asked is what do we need to do when expiration is approaching? We must either roll our positions or close them out. Viewers are reminded that buying back short options at a price of 0.05 or less is free on the TOS platform. Tom said it was the smart thing to do and Tony stressed how it would free up capital to be better deployed elsewhere.
What to do with both winners and losers was covered. What happens with OTM and ITM options was detailed as was cash settlement versus a settlement into the underlying.
The special danger of spreads was discussed. Also, there was additional discussion of risks on today's "Opening Bell" segment that were not mentioned during this segment. The "Market Measures" from October 14, 2014 covered the risks in detail. It is worth reviewing.
Watch this segment of “Best Practices” with Tom Sosnoff and Tony Battista for important information on expiration week.