Today I want to talk about how professional traders ride options into expiration.
And to be clear, I’m not talking about 20-cent options that are $5 out of the money (OTM) on the underlying stock.
I’m talking about when you have an options trade that’s in the money (ITM) — or when the price of the underlying stock is higher than the strike price of the option.
A lot of trading books and “experts” will tell you, “Close out ITM options the week of expiration!” Or, “Close them out early before they expire because of time decay!”
And I’m here to tell you that’s all junk…
When you’re trading ITM options and approaching expiration, don’t worry…
Because you’re basically playing the stock itself.
To show you what I’m talking about, we’re going to look at recent May call option in Keurig Dr. Pepper Inc. (NYSE: KDP).
On May 19, the stock was around $35.80 a share and barely moving at all. The $35 strike calls were trading for a small premium — around $0.80, and about to expire in two days.
Conventional advice suggests there’s no reason to hold on any longer, and that traders should exit this position.
But that’s not always the best advice, especially if traders manage their risk properly…
Frankly, if I’m worried that I need to close my ITM options early because of expiration, I’m trading too big of a position.
As for KDP, by May 20 the stock jumped above $36.40 a share. Now, a 1.5% stock move doesn’t sound like a big deal, but these are ITM calls.
That means when the stock gains another $0.60 above the strike price, that move also gets priced into the option premium. At this point, it’s basically playing a stock replacement.
So those calls that were $0.80 on Wednesday are worth $1.40 by Thursday. That’s a 75% gain in less than a day with another day to go. And a lot of professional traders like myself will hang on until Friday if the stock hasn’t made its break yet.
Now you might be saying, “Lance, there’s only one day to go until expiration. Aren’t you scared?”
Well, no, and in today’s short video, I’ll walk you through the three possible outcomes for trading ITM options at expiration and show why selling early isn’t always the best decision. Don’t forget to subscribe to our YouTube channel if you haven’t already so you can be notified as soon as we post our next video!
P.S. I’m willing to bet most traders don’t know there’s a little-known rule causing a glitch in the stock market…
And those who can spot it have the chance to grab double-, triple- and even quadruple-digit gains, sometimes as quickly as overnight!
That’s what happened with KNDI when it saw a 2,340% gain… And when GME rose 4,200%… Heck, just this past week, AMC call options rose over 1,000%!
Luckily for us, Wall Street legend and Forbes contributor Adam Sarhan has found the glitch, and he’s ready to share it!