For Options Sellers, 'Good Friday' Comes Every Month

Option owners hate time premium. That term is defined as the part of an option's price that represents the out of the money part of an option's total premium. Why do they dislike it so much? Once they've purchased a call or put, every week that goes by diminishes that value as there is less time left until expiration day. By then, an option's only true worth is the amount that is in the money compared with the strike price. Many times that number equals zero. Losing 100% of your initial investment really hurts. It is the dreaded permanent loss of principal. Option sellers, though, love time premium because they sell it. Seeing it decrease in value or even disappear is an option writer's dream. Normal monthly options always expire on the third Friday of the month barring a holiday that day, which would move expiration up to Thursday's close. Option sellers think of those third Fridays as Good Friday. That's when their obligations to buy or sell shares either disappear or end with exercises at exactly the in-the-money value. If, upon expiration, a stock closes below a call's strike price, option sellers get to keep their shares plus any cash generated via those call option sales. If, upon expiration, a stock closes above a put's strike price, the option seller keeps all money collected from the put sale and their obligation to buy is extinguished. Keeping 100% of the premiums while not needing to deliver or purchase shares is the epitome of getting something for nothing when the trades play out that way. Many times I close out options prior to expiration day. This month I still had nine underlying stocks with options ready to expire last Friday, Dec. 18. The following data show actual real money trades that ended last week. It was a very profitable Good Friday. One of the stocks, Matthews International , only had puts expire. Five of them -- Acuity Brands , Ebix Inc. , Fidelity National Financial , Genesco Inc. and The Children's Place -- only had covered calls expire. One stock, Wolverine World Wide , was called away, but at a better price than I could have sold for at its 4 p.m. ET closing quote. Two stocks, G-III Apparel Group and Tutor Perini , had both calls and puts expire on Dec. 18. Details on all those transactions are shown below. All quotes but WWW's were as of 3:06 p.m. ET last Friday. WWW's was at its 4 p.m. final quote so I could accurately show the exact benefit of the call option upon its exercise. Total all those gain up and you'll see that I booked $18,456 net of fees on the whole group. That's pretty good pay for selling time, a raw material that cost me nothing. You might be richer than I am, but in my world an extra 18 grand or so pays a lot of bills. Selling options is like shampooing your hair. Lather, rinse, repeat. I was able to sell some new covered calls on a couple stocks last Friday to get the ball rolling once again. All the call options that expired last week allow for new sales of covered calls again at any time starting with Monday, Dec. 21. I like to sell strike prices that allow for nice gains should the underlying shares do as well as I think they might. My newly sold Caleres Inc. calls were for Aug. 20, 2021, at a $22.50 strike price. The sale, at $1.05 per share ($1,050 for the 10 contracts) went through late in the day as CAL closed near its high. If I'm lucky enough to see CAL at or above that $22.50 mark next August I'll have gained another 77.2% plus dividends from last week's close. I also sold eight total contracts of Jun. 18, 2021, expiration date $70 calls on PLCE at an average cost of about $4.14 per share. I got that price early in the day when PLCE was up nicely. By 4 p.m. the shares had fallen back a bit on the day. If I end up getting called away on those shares I'll have received $74.14, about 70.6% more than PLCE's Dec. 18, 2020, quote. The best time to sell call options is when a stock is moving up. The best time to sell puts is when a stock is plunging. I also sold some longer-term calls on PLCE out to Jan. 21, 2022, at a $100 strike price. If those eventually get called I'll be paid a total of $103.80 per share ($100 + $3.80). I'm willing to hold PLCE for that extra 13 months for the chance to make an additional 129.6% from last week's close. All in all, these three new call sales brought in $6,260 in option premium. That cash is already reflected in my accounts and can be spent or reinvested in whatever I choose. Covered call premiums are the proverbial bird in the hand. The money is yours right away and your risk is immediately reduced by the per-share amounts paid to you. The only downside is that you've capped your maximum gains through the options' expiration dates. With potential upsides like the ones detailed above, I'd be very satisfied to make only those percentage gains even if the stocks go even higher. You take that same risk every time you ring the register by simply selling. There no way to know that same share won't fetch even more down the road. December is traditionally a slow options month. The majority of stocks trade options on the January, April, July, October cycle. The busiest expiration month is typically January. That's when normal monthly options and LEAPs (long-term options out a year or two) generally expire at the same time. January Good Fridays can be unusually rewarding if the markets are in a bullish mode.

For Options Sellers, 'Good Friday' Comes Every Month

That's when time is up and their obligations to buy or sell shares either disappear or end with exercises at the option's in-the-money value.

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