Baerrus Magnus
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March Options Expiration - Handling Butterfly Spreads

Today, March 20th, 2015 is the last day of trading for March monthly options. Hence - a house cleaning day. All the options, locked into a limited risk strategies like butterfly spreads, have to be liquidated. I had a few butterflies and one vertical spread in my inventory waiting to expire. Expiration handling is a routine business, but occasional nuggets that warrant some looking at. Here are my basic positions which I closed today:

  • I had a Condor in CELG Calls 117 / 120 / 121/ 124. I liquidated separately as bear spread and a bull spread. This condor spread was deep in the money. With CELG trading around $127 the condor was worth zero. I closed $0.08 below parity, though I think I could have squeezed this down to $0.05. Anyways CELG has an excellent liquidity so I closed it first, early in the session. Btw, in the after hours I went short CELG @ 127.9.
  • Had a butterfly in March MGM puts. Basic position was 20 / 21.5 /23 Puts, which was slightly in the money. I was able to close as a single trade for $0.30 with MGM trading around $22.65. The interesting fact was that this butterfly was deep in the money with MGM having fallen down to $19. Then, a few days ago Market got excited about MGM prospects of converting its real estate assets into a REIT. And voila my spread went out of the money fast, only to drift back on the last day or so.
  • My first foray into trading bonds via options on TLT ETF left me with a nice little butterfly in TLT with basic position TLT March 123 / 125/ 127 Calls. I thought that I was very likely to collect on this one as 4 points spread on TLT could be considered pretty wide. Yet, TLT had rallied to 130 and change. With excellent liquidity I only had to give up $0.04. Two cents on each side of the spread, closing it as 2 transactions. Trading a deep in the money spread on expiration, there is no doubt that a Market Maker is on the other side. Hence I did not mind as 2c is a reasonable edge for MM.
  • Trading Credit Suisse, left me with a 25 / 24 put vertical. CS was sagging slowly but surely, until on March 9th they announced they are replacing their CEO. The stock jumped putting this spread OTM. My cost on the spread was just a few cents. So this trade was a scratch.
  • Then things have gotten weird when I wanted to close my BBBY butterfly. Basic position was BBBY March Puts 77.50 / 74 / 70.5. With the stock threading water around $75 there was quite a bit of value in that butterfly. So I put through a closing order for the whole butterfly spread with the limit, I thought was close to parity. Yet, the spread was over $1.5 wide. After a while, I decided to try closing just the 77 Puts as the rest of options in the spread were OTM and, with a few hours of trading left, very unlikely to be worth anything. After putting in an Ask of $2.50, I observed that the bid was $1.50. Giving me a huge B/A spread of $1. This is with 560 contracts of Open Interest. Also Bid showed ~500 contracts against my Ask of 3 contracts. After a while the bid grew to over 900 contracts. Yet, they would not budge from $1.50! Eventually, I got tired of this game. I simply bought 300 shares of BBBY and exercised my 77 puts, getting close to $2.50 a share. The point is if you hold ITM puts on the last day, make sure you get at least parity for them.