Ken Trester

The Thrill of Expiring Options

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Using this expiration strategy, I bought some call options on the S&P 100 (OEX) one week before expiration at 38 cents. Then, with three days left before expiration, I had to make an unexpected business trip, so I closed out the position at 75 cents -- 93% above my purchase price. While that was a terrific return, I could have experienced even more upside, thanks to another spike in the market in a very short time.

At expiration, the index was trading seven points in-the-money of the call option. (That is, it was trading $7 above the strike price of the call I had bought.) Had I held on to the position, my gain would have been almost 2,000%!

Keep in mind that if your options have a value of 5 cents or higher (for equities) or 1 cent or more (for index options) upon expiration, the Options Clearing Corp. allows for a procedure called "exercise by exception," in which your broker can exercise your options on your behalf if you have not instructed him or her otherwise.

In this case, because owning a call option gives you the right to purchase shares at the strike price, your broker would purchase the equivalent number of shares to your options contracts. (That is, if you have 10 options contracts, you control 1,000 shares; thus, you would then own those 1,000 shares.) This is why it is important to close your positions or to ensure that your broker knows to close the option and not exercise it.

If you purchase expiring options, make sure to buy the options really cheap, and particularly on weakness, where there is still a fair chance the index or stock price could trade up through the strike price and, thus, move the option in-the-money.

You need a lot of patience, as well as a high tolerance for losses to play the expiring options game. And there will likely be many months where you will not find opportunities. However, if the game is played correctly, this long-shot strategy can give you the thrill of some really big rewards.

To lean more about Ken Trester, read his bio.