Trading Options at ExpirationTrading options at expiration or, in reality, very close to the end of their life, can be an excellent strategy for gaining incremental income. Remember the beauty of options decay: at the very end of their life, options waste away the fastest. By selling out-of-the-money options a few days ahead of expiration you can maximize this decay effect to your advantage. Of course, there is a downside to this: there is very little value left in these late-term out-of-the-money options. So, make sure you are using a broker who charges very low commission when you do this. Let's look at an example. Jackie has 1000 shares of Merck (MRK) in her retirement account, where she has held it for over twenty years. She wants to hold this stock for the long term and has no plans on selling it. Every month, on the Monday before expiration Friday, Jackie looks at the option tables for MRK to find an out-of-the-money call two or more strike prices above the current price. If the option has 10 cents or more of value left, she'll consider selling 10 contracts against her 1000 shares of MRK. She reasons that the addition of $100 or more each month with little likelihood of being called out makes these late-stage covered calls a good deal, over and above the quarterly dividend she receives on the stock. You may wish to consider late-term option selling as part of your investing or trading plan.
Return for Trading Options at Expiration to Advanced Options
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