Let’s recap what happens with options expiration. At expiration, an option will reside either out-of-the-money (OTM) or in-the-money (ITM). All OTM options expire worthless, and all ITM options are automatically exercised. As an option trader, there are only four different scenarios that may play out with your option positions at expiration:

• Long OTM option
• Long ITM option
• Short ITM option
• Short OTM option

Because each situation is unique, each one is evaluated individually.

Long OTM options
If you are long an OTM call or put option that remains OTM, riding to expiration will only cause you to lose more money, as the option value will continue to erode until it expires worthless. Therefore, unless you anticipate that the stock will experience a strong enough move to put your option ITM, it is usually better to exit long OTM option positions prior to expiration to salvage whatever value is left in the option.

Long ITM options
Like long OTM options, it is also more expensive to ride a long ITM option position to expiration. As stated, ITM options are automatically exercised; thus, riding an ITM call (put) to expiration will result in you having to buy (sell) 100 shares of the underlying stock. Coming up with the capital required to buy (short) shares is obviously more expensive than merely selling the option before expiration.

Short ITM options
Suppose that one is short an ITM call or put. Would riding to expiration be cheaper than closing it out prior to expiration? Yet again, the answer is no. Short ITM calls would automatically be assigned, resulting in having to sell 100 shares of stock at the strike price. Rest assured, the margin required to short 100 shares is going to be greater than whatever it costs to close out the short call prior to expiration. On the other hand, allowing a short put option to expire ITM will result in having to buy 100 shares at the strike price. The capital outlay required for that is obviously going to exceed the minimal cash required to close the trade prior to expiration.

In the case of a covered call (long 100 shares and short ITM call), you may want to ride to expiration and allow assignment, but it's not necessarily cheaper than closing prior to expiration as the myth purports.

Short OTM options
That brings us to the fourth and final scenario: riding short OTM options to expiration. This is the most common scenario where it is cheaper to ride an option to expiration. For example, suppose I'm short a naked OTM put option that is worth $.05 and has a week until expiration. Consider the following two scenarios:
1. I could close the trade now by buying to close the put for $.05. In addition to paying the $.05, I would also pay commission for the trade.

2. I could also ride to expiration and allow the OTM put option to expire worthless. This results in pocketing the remaining $.05 and avoiding having to pay commission.

Although it would be cheaper to ride to expiration, this assumes the option remains OTM. What if the stock undergoes a gigantic move the last few days before expiration, resulting in your short option moving ITM by a dollar? That option, which was trading at $.05, is now trading at $1.00. In retrospect, you will kick yourself for not buying it back at $.05 when you had the chance. That's the risk you run when trying to eke out every last penny of a short option's premium. My experience has taught me to buy back any short options that are almost worthless (maybe $.15 or less). It might not be a bad idea for you to at least consider the benefits of foregoing the last few dollars in exchange for eliminating risk.

Myth #2: Option volume is a directional indicator.

One of the most common ways traders use option volume is by looking for huge increases in volume (number of contracts traded) in an effort to identify big traders that may know something about such events as a future take over, FDA announcement, or other news likely to drastically move the stock. In other words, the options market may be tipping its hand and hinting at a potential big move in the underlying stock.
At first blush it may seem as if identifying abnormal option volume is a great way to find out when a stock is poised to make a big move. However, there are a few caveats that make option volume a bit more complex than it seems.

First, volume is relative. In other words, high volume for Microsoft (MSFT) options is completely different than high volume for Chipotle (CMG) options. So don't be too quick to think that 5,000 contracts, which is definitely high volume for CMG, represent high volume for MSFT. Make sure you familiarize yourself with the average number of contracts traded for a specific stock before trying to identify what qualifies as high volume.

Second, for every buyer there is a seller. In other words, if there are five contracts traded today, there were both five contracts bought and five contracts sold. Consequently, you can't merely look at the total amount of contracts that traded and discern whether they were buying or selling the options. Unfortunately, you have to dig a bit deeper and see whether or not they traded on the Ask, which implies the options were bought, or the Bid, which implies the options were sold. Furthermore, even if you found out if they were bought or sold, you don't necessarily know what strategy the options buyer are utilizing. Suppose you find out a big buyer came in and purchased a ton of out-of-the-money puts. While your initial thought may be that they are placing a bearish bet, they may actually be bullish by already owning shares in the underlying stock and merely want to buy protection, or perhaps they were entering a put vertical or calendar spread. The bottom line is that it's tough to identify a huge increase in open interest or volume and know what it means. Some traders may enjoy using abnormal volume in their option trading, but it's not really my cup of tea. There's too much other, easier to discern, information that one can use.

Third, for every good signal you get from abnormal option volume, there are probably two or three signals that don't come to fruition. With all the take-over chatter that's out there, you are bound to have numerous abnormal volume trades occurring as people speculate on the rumors, but, in reality, few big winners really occur. It is sometimes difficult to discern what exactly differentiates a good abnormal volume trade from a bad one. There is always a lot of random speculation within the options market. In the end, there are a ton of other signals, such as technical analysis, we could use for predicting stock direction before looking at abnormal option volume.