Important Notes

This lesson will build on the discussion around holding an option into expiry and offer you some real-world insights derived from our own experience.

We have, on more than one occasion, seen with our own eyes how a futures market can trade down (or up) 5, 10 or even 15 points in the LAST TWO MINUTES before market close and then close. Then, on the following Monday, when the futures resume trading it opens at the price it was before those last 2 minutes!

However, the options were exercised on the market closing price! So, if you held a deep in the money call option, you would think that you had a lot of profit here, but when you wake up on Monday morning you will find that there is nothing – your option expired worthless!

You then look at the prices and you think – “but on Friday I had a $1,000 profit but looking at prices this morning I should still have $1,000. Where is my money!?”

On closer inspection, you will then find that the market closed 10 points lower on Friday and your option expired worthless! What you should have done, was to take profit on the Friday BEFORE the close!

What’s even worse than this, are those traders who were long out of the money (OTM) Puts and that last minute move, when price closed, resulted in their Puts going in the money (ITM) and on exercise they were given a short position in the futures at the strike price. You can probably now see in what trouble they would have been in when the market opened 10 points higher!!

Please take note of this, it is not worth taking these sort of chances – GET OUT BEFORE THE CLOSE!

Before we finish off this lesson, there is one important difference regarding speculators in the market that we want to highlight:

Our example of a client taking out insurance would have been happy if the option expired worthless! He was afraid of the market prices trading at a certain level and that is why he took out insurance against it in the first place. Since that situation never arose, he remained a happy client. The premium he paid was simply to protect him from a “what if” situation and he was happy to write off that premium as an expense.

But a speculator, on the other hand, would not be happy if his option expired worthless because he wants to make money! So, a speculator will only buy an option if he thinks there is a very good chance that the option will expire in the money – he wants to get back the premium he paid and then something extra!