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hey everyone welcome back to the show thanks for tuning in my name is mike this is my whiteboard and if you're brand new to the show this is a show where we take concepts we break them down and we build them up visually for you so today we're going to talk about holding an option through expiration last friday was the standard monthly expiration for april but we're going to talk about today is going to apply to all the expirations that whether they expire on a friday which is normal equities or maybe a different day if we're looking at something like spx or the vix all these are going to apply and we're going to talk about the difference between holding an option that's in the money through expiration and letting it expire to stock versus closing out that option and maybe buying stock or doing something to synthetically replicate what would happen if we just held it through expiration we're going to talk about a few factors that differentiate the two so let's talk about our first trade we'll just create a hypothetical scenario where we're selling a put here and we're just looking for our standard 45 day till expiration selling and out of the money put so here we've got the stock price trading at 50 and we're looking to sell an out of the money put at 45 and we're going to collect about a dollar for it in this example now as the trade goes on let's say 45 days have gone by the stock price swayed up and down a little bit but it ended up going to 43 at expiration we've got zero days left so let's say this is a regular equity trading vehicle so we're looking at a friday so we're on friday expiration we've got just until the market closed to trade this and the stock price is at 43 and we've got our short put at 45. well the very first thing we need to do is calculate our p l on this trade well if i know that at expiration this option is going to be trading for intrinsic value or very close to intrinsic value in this example we're going to assume that it's trading for purely intrinsic value so i know that if i have a short put at 45 which gives me the right to become long shares at 45 and the stock price is at 43 this in the money put is going to have intrinsic value of 200 it's it's two points in the money as you can see the stock price is at 43 and our short point is at 45. so we're going to see a theoretical loss on this trade of 200 however i did collect one hundred dollars or one dollar at the beginning of this trade which i can use to offset those losses so even though i would have to purchase this put back for about two dollars or two hundred dollars at expiration because there's no time value left in that option there's no extrinsic value i do know that i originally collected a dollar so i can use that dollar to offset that payment that i'd have to purchase this put back for to give me a p l of negative one hundred dollars so in any case this would be a losing trade of one hundred dollars but there's a few things that i can do...