Managing Options Positions Near Expiration
(Broad caveat: in most cases, I enter Long Premium trades with at least 45 or more days until expiration. Often two or three months out, sometimes even further)
Long Premium Positions
Long Calls or Long Puts (debit): If our long calls or puts are either near-the-money or out-of-the-money, then the value of the option is largely extrinsic -- meaning, if the underlying doesn't make a meaningful move in our direction soon, then our options stand to lose a majority, if not all, of their value. And as we approach expiration, the rate of this value decay accelerates with each passing day, becoming an increasing drag on the performance of our position. Therefore, once inside 21 days until expiration, if we're holding long options with largely extrinsic values, we'll look to exit them ASAP.
Long Verticals (debit spread: long option + short further OTM option): Similar to straight long call or puts, if we haven't hit our profit target on long vertical spreads, then it's likely theta will rapidly start decaying whatever premium is left in this position. For all the reasons listed above, we want out of long vertical spreads inside 21 days to expiration.
Long Calendars (debit spread: short near-term option, long further-dated option, same strikes): Inside of 21 days until expiration, if we're still holding a calendar spread and presumably our short option is out-of-the-money, I'll either look to close that short option out cheaply (below 20 cents) and continue riding the long option, or I'll roll it out to the next month for a credit if my long option is more than one month away. This allows me to take in some additional credit for the position and effectively lowers my risk by lowering my total net debit for the entire trade. If the position isn't working out, I'd rather have that additional credit from the roll to cushion the blow than still be in the soon-to-be expiring options with very little additional gain to achieve. After the completion of the roll, the original trade plan remains the same: I'll close the whole spread down if the underlying trades to our strike price.
Long Straddles/Long Strangles (debit spread: long call + long put): Inside of 21 days, if the underlying is trading anywhere between our upside and downside breakeven levels on this trade, the position likely isn't working out and theta is going to become a real problem here, real fast. We'll cut and run on this trade ASAP. On the other hand, if a big move in the underlying has happened and one of our legs is deep-in-the-money (winning option has a delta greater than 80), then we'll treat this position as long/short stock and monitor support & resistance levels in the underlying closely to determine when to exit the position.
(Broad caveat: in most cases, I enter Short Premium trades with no more than 55 or more days until expiration. I want to be participating when theta decay is beginning to ramp up and favor my short options)
Short Premium Positions
Short Naked Puts (credit): In nearly all cases, I seek to cover naked short puts when I can cover them for half of what I collected at initiation. So for example, if I sold a naked put for $1.50, I look to cover that short at 75 cents. Anyone who's been around this business long enough knows that downside moves often happen fast and furiously. The last thing you want to do is be sitting on a naked short put, trying to squeeze out that last 15 cents when suddenly an overnight news item comes out, stock gaps down 10% and your short puts that closed the previous day at 15 cents will now cost you $8.00 to close. This is gamma risk. I've seen it happen. You don't want to be there. And this gamma risk becomes more severe as we get closer to expiration. So, inside of 21 days to expiration, if we're still sitting on short options that haven't yet hit our profit target, winning or losing, I want out. I can always reposition elsewhere in a later month if I still think the play has merit.
Short Vertical Spreads (credit spread: short option + further OTM long option): Similar to short naked puts, if we haven't hit our profit target on short vertical spreads (close when we can buy back for the half the credit we received at trade initiation) by the time we're inside 21 days to expiration, then it's likely theta will start working against us and if the underlying is trading between our two strikes, the gamma risk will make the P/L swings for this position much more violent than what we'd been used to up to now. Violent P/L swings induce bad decision making and therefore I like to avoid those situations all together. Inside 21 days to expiration, any short vertical spreads still being held will be closed ASAP.
Iron Condors (credit spread: short OTM put vertical + short OTM call vertical): Similarly to short vertical spreads, I seek to close Iron Condors when I can cover the entire spread for 50% of the premium I collected at trade initiation. However, if we find ourselves still holding an iron condor inside 21 days to expiration, this likely means the underlying is uncomfortably close to breaching our breakeven levels, or maybe we're even sitting on a loser. In either case, theta is possibly starting to work against us, and gamma most definitely is. No time to argue. Just close the trade. We can always re-establish a new Iron Condor, repositioned at better strikes, in the next monthly series and give it another go.
There are many more options strategies out there to employ, but these listed above have been the common strategies we've employed this year so thought it best to zoom in on these.
At the end of the day, options trading is more art than science. There's alway room for flexibility and rigidity often works against us. The Best Practices outlined above serve me well in most cases as we approach options expiration, but I'll admit to straying from the reservation from time to time if I feel like I have a very smart reason for doing so. It doesn't happen often, and it works out for me even less often than that. So my advice to you and to myself is to do so sparingly.
Happy Trading!