Don’t make this mistake with Options Expiration!
OK, here is the answer to the riddle, finally, about the single biggest mistake every options trader makes at least once. Hopefully this can prevent you from doing the same.
In December, I was holding two oil stock options, figuring that they could only go up in value at the beginning of the winter. Naturally with this recent market, I was wrong. Both options steadily declined in value and eventually I just decided to let them both expire worthless.
NOTE: This is NOT part of my trading strategy. I even have it in writing to dump any option that loses 50% of its value. But I got lazy and kept “wishing” that the market would turn around.
When I got back around to looking at the market thinking I’d try to make a trade, I noticed my cash balance at negative $3000! I thought perhaps I’d made a mistake in making a trade, perhaps purchased 10 or 100 contracts instead of just 1 contract. I carefully looked through my transactions and did not see any accidental purchases.
The I looked again and noticed that I owned 100 Shares of STOCK in Murphy Oil Corporation. How the hell did that happen? I had let the option expire worthless, and did not exercise it!
So I got onto live chat with my broker’s support line, and was told that any option whcih expires at least 5 cents in the money is automatically exercised! Now I am the proud owner of 100 shares of stock, bought on margin.
My carefully learned, planned, written option trading stragtegy with some “fun money” was totally blown because I did not fully understand one of the fundamental rules of the Chicago Board of Options Exchage.
Live and learn. This completely ruins my trading account strategy since all of my money is tied up in this equity…the whole reason I’m trading optoins and not stocks…the equity is far less liquid.
Now I’m waiting. It’s still a good company with good fundamentals and it’s an OIL stock after all. it HAS to go back up.
I hope this has helped you learn something about what do to on options friday!
Suzanne @ February 6, 2008