Expert Strategies for Option Expiry Date Decisions
How do I select the right expiry date for my trading strategy?
Selecting the appropriate expiry date for your option trading strategy should align with your market analysis, trading goals, and risk tolerance. Consider short-term options for quick market moves and long-term options for more gradual strategies. Time decay and volatility should also influence your decision.
What are the potential risks associated with holding options until expiry?
Holding options until expiry can result in potential loss of the entire premium paid by buyers or, for sellers, the risk of assignment at potentially unfavorable prices. Close monitoring and proactive risk management strategies are essential as expiry approaches.
How does time decay impact option value as expiry approaches?
Time decay, or Theta, accelerates as an option's expiry date nears, eroding the option's extrinsic value and leaving only intrinsic value if any. This effect is most prominent in the last weeks or days before expiry, significantly impacting the value of options close to the money.
Is it better to close option positions before expiry?
Closing option positions before expiry can capture profits and protect against last-minute market reversals that may diminish the option’s value. It also allows traders to reallocate capital to other opportunities without facing the accelerating time decay or a potential total loss if the market moves unfavorably.
What is the exercise and assignment process in options trading?
The exercise and assignment process is when an option holder exercises their right to buy (call) or sell (put) the underlying asset at the strike price upon expiry. If an option is in-the-money, it is often automatically exercised unless a Do Not Exercise request is made. Assignment obligates the option seller to fulfill the contract terms.
