basic question - expiration ITM

S

Shay

Hi,

basic question which confuse me -

if i sell Iron Condor -
Sell Put Strike 52, Bid = 0.40
Buy Put Strike 51, Ask = 0.20
Sell Call Strike 63, Bid = 0.40
Buy Call Strike 64, Ask = 0.30

(for understanding, let's assume i am not using mid price, i am using the Bid/Ask prices)
so i am getting 30$ credit (+40+40-20-30)

1 day before expiration,
the price of the stock is 51.85
and i want to close my order
(actually i wanted to wait for expiration, but i am doing backtests, and my last trading day is 1 day before expiration)
so maybe this is the problem, i am trying to calculate expired options using 1 DTE.
i probably need to look at the strike price on real expiration date (0 DTE), and calculate the ITM value of the option.

let's get back to where i thought i was before my last sentence -

the call options are worthless

but the put is ITM :
Put Strike 52, Ask = 1.20
Put Strike 51, Bid = 0.70

how much Profit/Loss i have ?

the 52 Put Strike is worth 0.15 or 1.20 ?
0.15 is because the stock price is 51.85
but the Ask price is 1.20
so i am confuse with this basic question.

please explain.

Thanks,
Shay
 
Shay said:
the 52 Put Strike is worth 0.15 or 1.20 ?
0.15 is because the stock price is 51.85
but the Ask price is 1.20
so i am confuse with this basic question.
More...


The intrinsic value is $0.15, but the ask is $1.20. You have to close the ITM short option so you are pretty well stuck with the ask. You could try a limit order lower than the ask but your priority is to buy-to-close the ITM option before expiry.




:)
 
thanks for the answer !
so if i want to close the order before expiration (1 DTE) i need to pay 1.20

what about the calculation of my PnL if i will wait for the real expiration.
let's say the stock is on 51.85 on expiration.

the 51 put that i bought will be worthless
what about the 52 put i sold, it will be worth 0.15 ??
i will be assigned, right ?
so i will need to sell 100 shares on 52$
and i will need to buy 100 shares on 51.85$ so i could close my position.
meaning 0.15*100 = 15$ loss on this put
but i got 30$ credit
total : +30 -15 = +15
???

Shay
 
Last edited:
Shay: It seems you are looking for a "worst case" fill case. IF so, then you close your long PUT at the bid of 70 cents, and close your short PUT at the ask of 1.20, for a cost (not counting commissions) of 50 cents (+.70 - 1.20). You offset this by the initial 30 cent credit for a loss of 20 cents. I may not be understanding your question well.
 
stepandfetchit said:
Shay: It seems you are looking for a "worst case" fill case. IF so, then you close your long PUT at the bid of 70 cents, and close your short PUT at the ask of 1.20, for a cost (not counting commissions) of 50 cents (+.70 - 1.20). You offset this by the initial 30 cent credit for a loss of 20 cents. I may not be understanding your question well.
More...
yes, i am looking for "worst case" (i prefer to be surprised for the good)
your answer is correct for closing the order 1 DTE

my second post was regarding the PnL of the expiration
so like OptionGuru wrote,
the 51 is OTM so it will be worthless
my question now is how to calculate the PnL on the 52 short put.

Thanks !
 
Shay: If you fail to close your short position that is ITM, you will be assigned, as you are aware. The "realistic" issue, is the time from Assignment to the time you are able to exit your "assigned" position, the price can CHANGE! I do not see how you plan to deal with this increase in RISK. So, IFF you ignore commissions and assignment costs, then you purchase 100 shares at $52.00 each. So your PnL after expiration/assignment becomes $30 - $5,200 + (Value of the new position). You will be exposed to opening gaps when market opens on next trading day, which does not seem like what you may be trying to model.
FYI: For my backtesting, I am using a simple PnL calculation, which is merely "Cash Flow" + "Position Value", where Cash Flow is adjusted for each trade, and "Position Value" accounts for all open positions. Very simple, but seems to work well.
 
i know there might be difference between the prices.
i want to do backtests like i would do in real paper.
so what do you think i should do -
if i will close my orders 1 DTE, then i understand what to do : 120-70 ... like you wrote above.
this is the easiest and simple math.

but if i want to go to expiration,
if i am FOTM, then i will treat it like worthless
but problems with the ATM/ITM
what do you think ?
 
Shay: Personally, I would never want to be in a position where Assignment is possible without time for me to immediately close the new assigned position. So, to approximate taking to expiration, you may consider taking the position up to say, 15minuites prior to expiration, then closing the trade, which should be very close to 0 Extrinsic value remaining. You can, for modeling purposes, assume that OTM strikes are worthless and ITM strikes are approximately the Intrinsic value (since only 15min of time value remains). -- Note that volatility is similar to time on these; as you approach expiration, the volatility tends to zero.
A simpler approach is to only use European Style options, such as SPX & RUT, which are always cash settled, and have no assignment. --These do not exhibit this issue.

However, if it is your desire to back test actual assignment, then you may merely want to do that! Convert the ITM expirations to long or short positions in the underlying, and then manage that position as you would for your strategy. -- So, for any Expiring Option which is ITM by 1 penny or more, close the option (no cost impact), and enter the new position at the option's strike price. -- Please note that assignment comes with additional Brokerage costs, so to be accurate, you should consider quantifying those costs as well. (I have not done this myself, so double check my recommendation)
 
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