It's that time of day, the end of the day when you have to make decisions about your options trades. Your long swing trade is performing well. Should you risk the accumulated profit and hold overnight, or should you sell at least part of the position and lock in profit? How do you know what you should do?

With markets as whippy as they've been, you don't know, but there are some decisions you can think about near the end of the day. Although we ordinarily don't see them, the market-on-close orders are visible to institutional traders and market makers about twenty minutes before the close. It's probably best to start making some what-if decisions before those MOC orders hit, perhaps about ten minutes before that time. Traders can set up some scenarios in preparation for market action that might occur if those MOC orders are leaning toward the sell side or buy side, and if the action carries through to the end of the day.

For example, as the close neared on August 3, 2009, the SPX was maintaining values just above 1,000, good news for bulls. Imagine that a little more than a week previously, on July 23, a trader had bought 4 SPX AUG 975 calls at $21.10, with the SPX having closed above the June high that day. As of the close on August 3, the mark or midpoint of those calls was $38.00. Accumulated but as yet unrealized profit would have been a hefty $6,760 minus commissions and fees.

What considerations might guide the trader's end-of-day decisions if holding such a profit? Of course, from this point in time, we can look back and have more information about what might have been best, but there wasn't a crystal ball that foretold the results then. The chart seen below was snapped that August 3 day, and the theoretical pricing information found later was calculated then, too.

Annotated Daily Chart of the SPX:

Bears could have pointed to the SPX's stop at that rising red trendline as evidence that it was time for a pullback. They could point out that the RSI's nosebleed level indicated that the SPX was ripe for a pullback. Candlestick aficionados could point to the abnormally large number of "record days," days in which the SPX has closed higher than the previous day. That number was so extended by August 3 that candlestick theory would suggest that a pullback was due, too.

Bulls had ample evidence on their side, too, that day. RSI might have been in nosebleed territory, but it was still trending there. Moreover, once an uptrend is established, the SPX has a long history of thrusting higher and trending sideways 3-5 days while the 9-ema (my preference) or 10-sma catches up. Then it sometimes pierces that average before closing at or above it and taking off again the next day. The trader with that hefty profit, thinking about the SPX's close above 1000, might have been willing to risk a possible pullback to the 9-ema or 10-sma, using a close below one of those averages as a sell signal.

However, given the overextended nature of the rally and the way the SPX ended the day jammed up against potential resistance and approaching even stronger potential resistance, what would have been the harm in locking in some of that hefty profit? The trade originally cost $21.10 per contract or $8,440 plus commissions, for example. Selling three of the four contracts at the close on August 3 might have netted $11,400 minus commissions, leaving the trade with a $2,960 profit, minus commissions, and a free trade on the remaining call contract.

What about turning that long call position into a free bull call spread? The mark or midpoint of the SPX AUG 1000 calls that day was $21.70. If they had been sold for that amount, the trader would have been establishing--depending on commissions and fees at that trader's brokerage--a free or nearly free SPX AUG 975/1000 bull call spread. The amount collected when the AUG 1000's were sold would have probably paid for both the purchase of the original 975's and the commissions and fees.

Let's consider some possible outcomes if the trader had sold four AUG 1000's to create that free or nearly free bull call spread, held onto the original four AUG 975's, or sold three of the original four AUG 975's to lock in partial profit and held onto the last contract. We know now how the SPX behaved, but no one could have been sure that day.

What if the SPX had started a sharp pullback the very next day, dropping toward 980, as it eventually did, but just sitting there the rest of the time into expiration? The trader who had chosen to turn those long calls into a bull call spread on August 3 would still have profited. Remember that trader sold the AUG 1000's for a little more than was spent originally buying the 975's. The cost of the 975's was likely totally offset even when commissions were considered. Those AUG 1000's wouldn't be worth anything if the SPX settled at 980, so the trader who sold them would have kept all that credit received, still totally offsetting the original cost of the AUG 975's. However, with a settlement at SPX 980, those AUG 975's, the trader's original position, would now be worth (980 - 975) x 4 contracts x $100 multiplier, or $2,000 minus commissions and fees. That's the profit under this scenario, if the trader had elected to sell AUG 1000's that August 3 day and create bull call spreads.

If the trader had just held onto the original longs through that hypothetical immediate drop to 980 and a settling there right into expiration, without selling the AUG 1000's to establish a bull call spread, no extra credit would have been taken in. The drop to 980 and settlement there would have meant the trader suffered a loss of $6,440 plus commissions and fees in this scenario. The SPX AUG 975 call originally purchased for $21.10 would then be worth only $5.00 per contract, so the trader would collect only $2,000 minus commissions when $8,440 plus commissions were required to purchase the options. That results in that loss of $6,440 plus commissions and fees.

The trader who had elected to take partial profits on August 3, selling three contracts, would have netted a profit of $2,960 minus commissions that August 3 day, as already noted. That left a single contract to run. That last AUG 975 contract would then have been worth 5 points or $500 when the $100 multiplier was applied. That trader's profit would be about $3,460 minus commissions.

What if, instead of dropping to 980 and staying there into expiration, the SPX had just hung around 1000 the entire time, settling there? The trader who had sold the AUG 1000's against the existing AUG 975's, creating an essentially free bull call spread, would find that the AUG 1000's were now worthless, but the original AUG 975's were worth 25 points. The profit would be (1000 - 975) x 4 contracts x $1000 multiplier, or $10,000, minus commissions and fees.

The trader who sold three contracts on August 3 and let the other run would already have collected a profit of $2,960 minus commission and fees, above the cost of the entire trade, as was already established. That means that whatever that trader made on the single remaining contract was extra profit. That extra profit would have amounted to (1000 - 975) x 1 contract x $100 multiplier, or $2,500, minus commissions and fees. The total profit would then have been $5,460.

What about the trader who had originally bought the AUG 975's for $21.10 and who hadn't elected to take any of these steps? That trader originally paid $8,440 plus commissions for that position, as noted earlier. Those four contracts would now be worth (1000 - 975) x 4 x $100 multiplier or $10,000, minus commissions. The profit would be $10,000 - $8,440 = $1,560 minus commissions. That's not as big as might have been imagined, right, or when compared to some of the other outcomes?

In most of these instances, the trader would have been better off to have locked in at least some of the profit in one of the ways detailed here. That's not always true, of course. Different scenarios and different outcomes could be considered. I urge readers to try some calculations if the SPX had settled at 1020.85, for example. My check the afternoon of August 21 turned up that value as the settlement value for August's SPX option expiration on one source.

A trader considering any of these tactics should discuss them with a preferred broker, asking for information on the pluses and minuses of such a strategy. Discussing all the various permutations would require an article for each. For example, not all option traders have clearance to sell options and not all brokerages would handle the maintenance/margin requirements the same way, so not all these suggestions are suitable for all traders.

The risk of not doing anything must be considered, however. The trader who believes that there's enough profit to weather a pullback should run some numbers through an option pricer. Many brokerages have such pricers on their site, and the CBOE certainly has one. One such pricer returned a theoretical value of $19.98 for that SPX AUG 975 if the SPX pulled back to 980 by Friday, August 7. That was below the purchase price for that option. Of course, in hindsight, we know that the pullback that occurred into August 6 was not that steep. If by August 11, the SPX had done what a bullish trader might have anticipated and bounced from that support and run back up to test 1003, one pricer returned a theoretical price of $32.75 for that SPX AUG 975. That's still hefty profit, of course, but not nearly as large a profit as was available if the trader had locked at least some of it in on August 3. Of course, in retrospect, we know that the SPX was to go much higher than the 1003 I was using for my estimations when this article was first roughed out, but, again, traders making end-of-day decisions don't have the benefit of hindsight.

Those who like to do so could also have studied the Greeks of their option position to help guide their decisions. As of the close on August 3, the position--long 4 SPX AUG 975 calls--was long 287 deltas, which meant that it would theoretically lose $287 for each point the SPX dropped, as long as a climb in volatility didn't compensate. It had a theta of negative 201, which meant that the position would theoretically lose $201 for each day that passed, unless price movement compensated for that loss. Not everyone likes to study the Greeks, but those who do would have known that theta was only going to grow more negative with each passing day as expiration neared, so time was going to eat away a long option's price more voraciously each day.

Another necessary end-of-day task is one that I used to take on, on behalf of all subscribers, when I wrote for the live portion of our site, the Market Monitor. A study of earnings and economic releases scheduled for the next day is essential in the end-of-day decision-making process. For example, one economic report due for Tuesday, August 4, was pending home sales, an important report in the current economic environment. That report, if well off expectations in either direction, could have moved the markets.

To sum up, examine all positions about ten minutes before those market-on-close orders begin hitting. Examine likely resistance or support to determine if the underlying is near an inflection point. Is it near enough that the next morning is likely to require an adjustment? Will economic or earnings reports be ones that typically move the markets? Run some pricing and timing scenarios through an option pricer, or, if you're familiar with the Greeks, study the Greeks of the position to determine if profit needs to be locked in or losses need to be hedged against or taken.

Not all traders will make the same decisions given the same situations, but I know what I would have decided that August 3 day. I would have taken profit on at least three of those AUG 975 calls, making sure that a profitable position would not suffer a loss, and then I would have let the situation play out the next morning with my remaining "free" AUG 975 call, deciding whether the morning's action warranted letting it run further or going ahead and closing that one for a profit, too. Lest you think that's easy to say, given the hindsight now available, that paragraph was actually typed out the evening of August 3. I would have been a happy camper to have locked in some profit, and also, I think, to have let the remaining long option run a bit.