Q & A. Must I buy those ‘worthess’ options

I'm adding an extra post today because I believe this is an important issue.  Especially on expiration day.


A Rookie Question: I sold 4 GOOG 560 Oct expiring naked calls recently, and
now its going to come down quite a bit today. I think  it
might get down to 0.10 or even 0.00 (as long as GOOG does not go above 560. Do I
still have to buy it back?

What if at the end of the day GOOG stays about $558
and I still get assigned with the option. I will have to come up with $400X558
(whatever that is) to give this person his shares. Can someone do that? I mean
can someone ask for buying the shares although the market value of the shares is
below the strike.

Lets say I wanted to buy GOOG on Friday and didn't get filled.
An on Sat I thought well…lets just get it through the guy who sold me the call
option at $560. In that case I will have to find a lot of money and buy shares
and give him that.

Could this be possible? ….Am I making any sense


Good morning.

Have to buy it back? You NEVER have to buy it back. You are allowed to let
the options expire worthless. But be warned, some brokers will force you to buy
the options today. They do not allow any customers to own a position that can
result in a margin call – due to an exercise. You would have to ask your broker
if you are allowed to watch the options expire worthless.

If you are truly a rookie, why are you selling naked call options? Why does
your broker allow that? It's a pretty risky strategy.

GOOG is up to the mid 540s before the market opens, and the market futures
are lower.

If this market turns around – and I am not saying it will – GOOG
could easily run past $560. Far higher.

It may be a 'waste' of money, but I would certainly pay $0.05 or $0.10 to get those options out of your account.

My guess is that the price will be higher early in the day, but if you want to
buy them – enter an order now, before the market opens. a LIMIT order, never a
market order.

If you don't want to 'waste' the money, you are NOT obligated to buy them

NO. You are not buying the stock, and don't need cash. You need assets to
meet the margin requirement. You would have a short position of 400 shares. I'm
sure you cannot meet the margin requirement for that, and your broker will force
you to buy the stock on Monday. Why take that risk. Who knows what the price
will be at that time.

There is almost zero possibility that you will be assigned if GOOG is less
than $559.99. Buy yes, someone can do that. The call owner has the RIGHT to buy
the stock at any time prior to expiration. The actual stock price determines
whether the call owner will elect to buy the stock at the strike price. But, no
one can prevent the person from exercising. It's his/her option and you have no
voice in determining if/when the option will be exercised.

Yes, you are making sense. But, Saturday is too late to exercise the option.
This afternoon is the deadline.

Don't take this wrong: If you do not understand how this works, if you don't
understand the risks you are taking when you sold those options, why did you
make this trade? This is important: Please understand all the risk and reward
potential for any trade BEFORE you get involved. It is not a trivial matter.


14 Responses to Q & A. Must I buy those ‘worthess’ options

  1. rick f 10/16/2009 at 8:56 AM #

    Amen, Mark.
    Depending on the instrument, I generally close out any short positions before expiration — index options no later than Wed and depending on the the price action of the stock/etf, close on Thurs or Fri morning.
    This week going into major earnings I closed out my SPX spread on Monday morning @ the open — just to be safe. Good thing, too!
    As you rightly say, it’s all about knowing what you trade and controlling your risks.

  2. Mark Wolfinger 10/16/2009 at 9:03 AM #

    I turned this comment into a blog post. It’s very important, esepcially on expiration day.

  3. Rob1 10/16/2009 at 9:26 AM #

    Thanks a lot Mark. I did close GOOG 560 option this morning for 0.15. That was great and made me some money. I know I should avoid these aggressive strategies….and I promise I will.

  4. Brian 10/16/2009 at 9:38 AM #

    yikes. I remember I wanted to sell naked calls on TLT late last year when it was in the 120’s … thinking now way could the long interest rate ever go lower :-). But I could not get approval to do that … and for good reason I believe! In retrospect I think it was a stupid idea although it would actually have worked out very nicely.

  5. Brian 10/16/2009 at 9:39 AM #

    oh wanted to add … I think the biggest thing I’ve learned from reading your stuff is the importance of risk management.

  6. Don 10/16/2009 at 11:47 AM #

    Mark…wanted to share this with you and with others because you have preached this extensively. In my TOS (Think or Swim account-paper Money) I woke up this morning expecting to close out an October expiration on a trade in the RUT, sleepily typing it in Iwas told that “this is not traded”, looking to make sure of the date (Yes it is Friday) it dawned on me that the RUT are european syle options that cannot be exercised early and close for trading on the Thursday prior to the Friday but are priced at the open- today (in theory) I made money, but not really that was wheer luck and the table could have easily been turned with a big movement (GAP open or down)- foolish mistake, rookie mistake and one that will not be made again. But what a fantastic lesson and reminder.
    Thaks, Don

  7. Manshu 10/16/2009 at 7:48 PM #

    Solid advice Mark. It’s great how you take questions at all levels and answer them in detail. I am sure it’s doing a lot of good to people who are paying attention.

  8. Mark Wolfinger 10/16/2009 at 8:41 PM #

    Don’t promise me.
    Just be aware of any risk you take.
    Congrats on a winning trade

  9. Mark Wolfinger 10/16/2009 at 8:43 PM #

    Selling calls is not the worst idea as a strategy. But by selling call spreads, you guarantee that there will be no disaster. To me that’s worth giving up a portion of the otential profits.
    Not everyone agrees.

  10. Mark Wolfinger 10/16/2009 at 8:44 PM #

    If I had believed all thsoe who tried to teach me about risk management – instead of pooh poohing it – I’d be a very wealthy man today. Sigh
    I hope the lesson lasts for as long as you trade.

  11. Mark Wolfinger 10/16/2009 at 8:47 PM #

    If it’s a one-time thing, gald it was with practice money.
    I am truay surprised every time someone is unaware of the characteristics of the asset that is being traded.
    It happens again and again. Glad it won’t happen again to you

  12. Mark Wolfinger 10/16/2009 at 8:47 PM #

    I certainly hope so.

  13. Rob1 10/16/2009 at 11:17 PM #

    Its certainly doing good to me! Thanks Mark.
    I also had another Q for U!
    I own some GOOG long calls (at 560) for Nov from some time ago. They have gone up now and I was wondering instead of unloading them, should I just sell the further OTM calls and just see what happens. e.g. if I am about to unload my 560 at $12, but I wait for few hours and now 570 calls are goin for about $12, so I say to myself lets just sell 570 for $12. I mean I did the calculation, it gives me a very good position. GOOG is not coming below 550 again (possibly ever!). but if it does not cross $560, I make good because of this selling 570 call thing….man I like to talk…I can go like this for ever.

  14. Mark Wolfinger 10/17/2009 at 4:18 PM #

    ‘Should’ is not something I can answer.
    Selling the 570 gives you a chance to make an additional profit.
    Selling the 570 gives you some extra premium now,
    No one can make that decision for you.
    GOOG is not going below 550 ever? I wouldn’t make any bets on that if I were you.