How to Manage Near-The-Money Put Strikes as Expiration Approaches – November 13, 2023
Many option traders who sell cash-secured puts prefer not to take possession of the underlying shares. Typically, when a trade is structured, the strike is out-of-the-money (OTM- lower than current market value). Exercise will occur when the share price moves below that (once) OTM put strike, rendering it, now, in-the-money (ITM). During the contract, if share price declines significantly, we have an arsenal of exit strategies to mitigate potential losing trades. This article will focus in on real-life examples taken from one of my portfolios on 6/15/2023 when 2 of the strikes were near-the-money and I didn’t want to take possession of the 2 Select Sector SPDR exchange-traded funds (ETFs).
Real-life examples with SPDR Health Care (XLV) and SPDR Consumer Staples (XLP)
- 5/15/2023: STO 1 XLV 6/16/2023 $131.00 put at $1.22 (XLV trading at $132.19)
- 5/15/2023: STO 4 XLP 6/16/2023 $74.50 puts at $0.67 (XLP trading at $76.28)
- 6/15/2023: Prior to the market closing the day before expiration, both positions were closed at net option credits
Brokerage screenshot on 6/15/2023 showing BTC trade executions
Trade Management Calculator (TMC) showing initial and final calculations
- Section #1 shows initial trade setups
- Section #2 shows breakeven price points (yellow cells), initial & annualized 33-day returns (brown cells)
- Section #3 shows post-adjusted total dollar ($312.00) and % returns (0.86% and 0.68%- purple cells)
Rationale for action taken the day prior to expiration
To avoid potential exercise, 5 contracts were closed late in the afternoon for a total cost of $81.30. I could have waited until Friday and paid a lower time-value premium to close but there, also, would have been the risk of paying a higher intrinsic-value component if share price declined deeper ITM.
Discussion
If avoiding exercise is an inherent requirement in our cash-secured put strategy (it may not be for some of us), exit strategy management is critical and may include buying back the put options as exercise approaches. When this strategy is executed, it will be at a net option time-value credit.
Author: Alan Ellman