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The "Daily Call" From Option Alpha

Kirk Du Plessis: Options Trader, Investor, Fund Ma

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The "Daily Call" From Option Alpha
3 MIN2018 NOV 3
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Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we're going to be answering the question, “Are there any advantages to letting options expire in the money?” And yes, we are talking about options that are in the money. This means you could have long options that you want to expire in the money or short option contracts that you're choosing to let expire in the money. And to me, really, the only advantage is stock ownership in one form or another. That would be the only advantage to me in letting contracts expire in the money. First, let's take the assumption that we are a long call option buyer or a long put option buyer and we want the stock to expire in the money. The only reason that we would want that to happen would be to convert our option position into short or long stock. Again, there's no real pricing advantage to it because at the end of expiration, the option contracts are going to trade basically in parity with the stock if there's any value left in them. You do have the disadvantage of having to go through the commission process and in many cases and with most broker platforms, the commissions to exercise or get assigned contracts are pretty high. But again, if you have the assumption that you wanted to get delivery of or wanted to be long or short the stock, then you could let it expire in the money.

Same thing would be applied in reverse for option sellers. If I'm an option seller and I sell a call or sell a put, the only “advantage” would be to let the option expire in the money if we wanted to get assigned short or long stock. Again, if we were shorting puts and we knew that we would be okay and willing to buy stock at the strike price, then maybe we let the option contract expire in the money and we are forced then to buy the stock at the strike price that we sold on the put side. Again, the disadvantage to all of this is the capital that's required to hold the underlying stock. It's much easier to use a stock synthetic using options which we’ve talked about in previous podcast and have video training on the website and in my opinion, we also remove the risk of commissions which in many cases, can be very high, sometimes $15, $20, $25 per contract to go through the assignment or expiration process. Although there are maybe some slight advantages if you even want to call them advantages, I am still a fan of closing positions before expiration even if they’re in the money. If you want to buy stock, then go out and buy stock at the new market price. Just remove the option contract. You’ll pay a cheaper commission and it’ll ultimately be a more simple process for you. As always, if you guys have any questions, let me know and until next time, happy trading.