Negative P/L at option expiration
Author: DamV
Creation Date: 5/11/2016 12:15 PM
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DamV

#1
Hi,

I tested a simple scenario buying a Call Option.
But at the expiration of the Option, the position is still open with a negative profit (value of the purchase).

I was expected a profit exercising the price of the strike.
It should be automatic because I don't see any function to exercise the option.

Can you please explain how it works for the option at the expiration in both cases:
- option is worthless => lost of my investment
- option has an intrinsic value

Thank you
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Eugene

#2
Hi,

QUOTE:
the position is still open with a negative profit (value of the purchase).

It doesn't have to do with options. Please see our FAQ:

Why all my backtest trades are negative?

In short, the entry price is $8.9, quantity is only 1 but the default commission (Fidelity) is $8. Hence the outcome (P/L). You can change this behavior in Preferences (check out the Wealth-Lab User Guide for more insight).


QUOTE:
It should be automatic because I don't see any function to exercise the option.

You can sell the contract using appropriate Trading function (Sell/Cover/Exit*).
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Cone

#3
Commission isn't much of a factor here. Remember, 1 Call controls 100 shares. So, if you sold that Call, you would have earned $890 profit (minus commissions). However, you bought the call, so you paid $890. Automatic exercise does not exist. If you want to "exercise", sell the option that you bought and buy the stock in your Strategy.

Just thinking...
It wouldn't be too hard to write a routine to check if an option expired in the money and buy the underlying, but the challenge will be in the Position Sizing. For that you could use the Position Options PosSizer and the .Tag property for % of Equity sizing. For example, tag an option size at 1% of equity and maybe use 5% or more for a reasonable stock size.
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Cone

#4
I thought about exercising an option in Wealth-Lab and offer the following.

It's not [often] possible to "exercise" the right to buy the underlying on expiry - or in the case of American options at any given time up to expiry. The problem is that you cannot enter a Position in Wealth-Lab at a specified price if the instrument does not trade at that price on the intended entry bar.

A viable backest solution/trade off is to recover the premium in the option by selling it at the close of the expiry and buy the underlying at the close. The script below includes a routine that will do that.

Another problem is sizing.
Remember unless you use Raw Profit mode or WealthScript Override, the Strategy is not able to determine the number of shares in a Position. The script below assumes that you select WealthScript Override and the approximate dollar size of the underlying stock to buy is a Strategy parameter. When an option buy is triggered, the script calculates the number of rounds lots of stock you can buy based on the dollar size; hence the number of options.

For the sake of an example, this strategy buys a Call at a strike price at least 5% above the current price 18 days before expiry.

CODE:
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