There's actually a name for your quandary, "pin risk". If the price closes just outside you'll be stuck with a position outside of the close, and there's no way to know how it will fall. That's why I love cash settled options, unfortunately there are really only the SPX weeklys, VIX, and the currency options that settle based on an actual spot price (someone tell me if there are others, haven't been able to find them except for some obscure ones like butter, some ICE energy options with no volume, and some ex-US options). The special opening settle that everything else uses is worthless unless you're actually hedging a real basket of stocks that you're buying/selling at their respective opens.
What time does IB auto-liquidate exp. day ITM options -Excess post expiry
- Thread starter NoVoodooHere
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There is another issue in some markets, such as NYMEX crude, that allow contrary instructions. That is the ability to exercise an option that expires OTM or abandon one that's ITM.
I was short a straddle that expired close to the market. During the two-hour period that allows contrary instructions, the OTM leg dipped ITM for a few minutes. I offset in the underlying and was surprised I still had that position come Monday morning. Whoever was on the other side of the trade left $100+ on the table. He was probably already in a bar sucking down a brewsky, but I'm too cheap to leave money on the table like that.
I was short a straddle that expired close to the market. During the two-hour period that allows contrary instructions, the OTM leg dipped ITM for a few minutes. I offset in the underlying and was surprised I still had that position come Monday morning. Whoever was on the other side of the trade left $100+ on the table. He was probably already in a bar sucking down a brewsky, but I'm too cheap to leave money on the table like that.
Thanks sig, so if I short QQQ and use it to offset my autoexercised Long 105c, AND buy back the short 107, then the pin risk is gone right? I think I can also put out a vertical offer out there 30m before expiration at let's say 198 and hope QQQ trades somewhere like 107.03 and the MM lift my offer.
No, there's no way to eliminate the risk entirely except with a cash settled options. You'll either end up with an extra long or an extra short because you don't know if the exercise is going to happen or not for sure until after 4:00. Great point by rwk as well, never even thought about that one.
Just keep in mind your margin requirement may go up significantly if you close just one side of spread, so you may have to close the entire spread.
Sig, kindly reconfirm your post. In my scenario where I am long 105c and short 107c and qqq is around 107 with 10m before expiration, I eliminate pin risk by buying back my short 107 let's say at 7 cents. leaving me with a $2 ITM 105c which gets autoexercised . At the same time I am buying back my 107 short call, I am shorting 100 sh of QQQ, the long from the 105c will offset my short 100 QQQ so pin risk is eliminated. In that scenario, paying the 7 cents is worth eliminating pin risk.
Yes, what you're saying will work. You do have to remember that the margin hit will be pretty big, so you'll need a lot of excess margin to do that, but you will have succeeded in removing the "pin" at 107. And you'll lose a little on the spread and commission with the 100 shares of QQQ you sell short, so you'll have to add that into your cost. On the plus side, you get a little positive exposure on the downside if it drops more than 2, since your short will continue to make you money while your call stops losing money because it's at 0.