Looking Out For A Roll Out

Well, it's expiration day again and I have one position, 7 MRK $51.50 calls, that's in danger of being in the money. This post is going to illustrate what happens during the day to call that's very close to "in the money".

Here's the situation about ten minutes after the open:

MRK at $51.49

$0.00 intrinsic value but someone thinks there's $0.22 worth of time value left in it (all time value estimates here are based on the "ask" price). Ten minutes later the $51.50 is in the money:

MRK at $51.55

That call has $0.05 of intrinsic value and now $0.17 worth of time value. One hour into the day (10:30 AM):

MRK at $51.27

After reaching a high of $51.72 MRK has drifted down and the call is now out of the money. Just  $0.10 in time value remains. All three major indices are just barely positive. After yesterday's big gains I could actually use a dip to pick up some volatility and increase options premiums for Monday.

11:30 AM:

MRK at $51.40

Out of the money by a a dime now but there's still $0.13 of time value. And there's been a good bit of trading too, with 1,213 contracts changing hands.

12:45 PM:

MRK at $51.30

With the underlying now $0.20 out of the money time value has evaporated. Only a dozen contracts were traded in the last hour.

1:30 PM:

MRK at $51.22

A few more contracts traded, a little more time value evaporates. The fact that there is still a bid suggests that someone thinks there's a small chance MRK will rise to close higher than $51.52.
If the market is going to rise into the close it should start moving in the next hour or so.

2:30 PM:

MRK at $51.33

With 90 minutes to go in the trading day there's no longer a bid for the $51.50, though another 10 contracts did trade in the last hour. The major indices have been essentially flat lined for quite a while now so I'm pretty confident I won't be needing to roll out today.

2:44 PM:

MRK at $51.44

And this is why we watch into the close. The market finally started to move up a little (the S&P 500 is up 0.28%) bringing MRK along with it.

3:30 PM:

MRK at $51.48

Looks like this one's coming down to the wire! If MRK is this close to the money at 3:45 I'll roll out. It takes some time to execute a trade and I want to be sure to keep my MRK.

3:48 PM

And there we have it. I rolled out 3 weeks and up a dollar for a net premium, including commission and fees of $386.20. I'm really happy with Schwab's service this afternoon; the order filled almost instantly.

As it turns out MRK closed at $51.48 so I didn't really have to roll out; but there was no way to know that at 3:45. And best of all, even though MRK is still $4.99 below my cost basis, the whole portfolio is now green by a whopping 0.12%