A Monthly Best Practice

When holding long out-of-the-money options, theta is your enemy. This is especially true in the last 2-3 weeks before options expiration. The daily decay in options premium – in percentage terms – increases each day as we get closer to expiration.

As such, one of my Best Practices is to review my portfolio of positions on the first trading day of each month and identify any positions containing long options approaching expiration.

If I am holding any, and these options are out-of-the-money, then the decision is easy: time to close and move on. I’m running out of time, the odds are stacked heavily against me, so I better close and salvage whatever is left of the premium in the trade. If I still like the setup in the stock and want to stay involved, then I’ll look for an entirely new trade to put on.

On the other hand, if I’m holding expiring long options, but they are in-the-money, then in most cases, this is a position that is working for me and I’ll attempt to hold on to it for as long as I can. This is where discretion comes in. I’ll begin placing a “mental stop” somewhere at or near a three-to-five-day low. I’m giving it an opportunity to continue working for me, but I’m tightening the leash.

In today’s Jam Session, I reviewed a couple of current examples of each scenario. I had long June options in $UBER that were out-of-the-money which I had to cut to eliminate the risk of any further losses. However, I’m also holding long in-the-money June calls in $SE that are working and you’ll see how I placed my stop at the preceding 5-day low, which I’ll continue to monitor and adjust daily as we approach expiration.

All this and more here:

Trade 'em Well,

Sean McLaughlin
Chief Options Strategist
All Star Charts, Technical Analysis Research