Welcome to our Options Trading Tutorial. Options trading is all about understanding leverage and trying to get the highest return investments to pay out in the shortest amount of time. You'll find that in this tutorial we delve into other related topics where leverage is important in order to improve your understanding of why options trading in most cases offers a better trading experience than other forms of trading.

Find out more about:
Options Trading Basics | Call Options | Put Options | Carry Trade | Inflation Investments | Option Brokers | Making Money on Options
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Thursday, June 17, 2010

Options Trading at Expiration Can Be Playing with Fire

If you are options trading near expiration and are a retail trader like I am - boy you can be in for a rude wake up call if your contracts are just barely at the money.

Ever Heard of Automatic Options Execution?

Yeah, odds are your broker features automatic options execution on contracts that expire in the money without being exercised or sold/closed out prior to expiration. What this means is that if your contracts are as little as 1 cent in the money your broker likely will exercise all those options on the next day and go hunting around in your account to find cash to pay for all the stocks YOU JUST BOUGHT. If you have 100 contracts with a strike price of $10/share... you had best have $100,000 cash - CASH in your account. If not, don't plan on ever being allowed to engage in options trading ever again. You'll be banned.

So What Do You Do With At the Money Options Close to Expiration?

Dude... you have to unload those contracts prior to expiration. That means engaging the market HARD to get those contracts rammed through the market makers - not the easiest of tasks when the market is illiquid and your contract is only a penny or two in the money. Not a fun situation to be in.

What If That Fails? How to I Handle Options Expiration Then?

If you're nearing closing time and your options are about to expire just barely in the money and leave you hanging, you've got to place that call to customer service (they've probably already called you) and get them to take the contracts off your hands.

That's your tip for today. Happy trading!
PS - Tomorrow is options expiration for June :)