Option Expirations: Mechanics and Strategy
Scenario
What Happens
Action Required
ITM by $0.01+
Auto-exercise
Close if unwanted
ATM ($0.01 range)
Pin risk
Explicit instructions
Deep ITM
Early exercise possible
Monitor assignments
Real Example: TSLA Assignment Risk
- You're short 10 TSLA $250 calls
- TSLA trading at $255 near expiration
- Risk: You might be assigned and forced to sell 1,000 shares
- Solution: Close position before expiration if you don't want assignment
Part 2: Advanced Expiration Dynamics
Strategy 2.1: Price Pinning
Example: META Pinning at $300
- Large open interest at $300 strike (100,000 contracts)
- Market makers delta-hedge as price approaches $300
- Creates "gravitational pull" toward $300
- Price often stays near $300 into expiration
Trading Opportunity: Sell premium around pin strikes
Strategy 2.2: Early Exercise Decisions
Example: NVDA Dividend Capture
- NVDA trading at $400, paying $0.50 dividend tomorrow
- You hold deep ITM $350 calls
- Time value is only $0.20
- Smart move: Exercise early to capture $0.50 dividend
Part 3: Expiration Trading Strategies
Key Rules for Expiration Week:
- Close positions early to avoid liquidity issues
- Monitor ITM options for assignment risk
- Use limit orders in last hour of trading
- Check for corporate actions/dividends
Quick Decision Guide:
- ITM by > $0.50? → Close or prepare for exercise
- Near large OI strike? → Watch for pinning
- Last hour of trading? → Use limit orders only
- Dividend coming? → Check for early exercise