to use a real life example (please advise if this isn't allowed and i'll edit) - my view on QBE (i could be wrong, form your own opinion first before you trade it!) is that it is likely to break to the upside of $16 in the coming months due to its US exposure and assisted by a deteriorating AUD/USD, but will likely have to test $16 for a while first - from 2009 thru most of 2011 it appeared well supported there so i think that may prove to become a support turned resistance level in the coming months.
to express that view, i bought may-july $16 call calendar spreads on QBE a few days ago, when the stock was sitting right on $16. my plan was to let the front leg go to expiry, then roll it to a june-july calendar spread, either by selling the june $16 calls if the may short calls expired worthless, or selling the june $16 puts if i got assigned and left with a short stock position (same thing anyway).
thru much of today it hovered around $16 - leaving me unsure of whether the may calls will get assigned and therefore whether i should be selling the june calls or the june puts.
of course it wouldn't be a problem if it's quite clear on expiry day whether the front leg is going to expire ITM or OTM, but today i felt it was iffy right up until the close. what do you do?
let the may contracts expire and wait until the next day to re-establish the calendar spread, once you know what you need to do? then you're sweating on dodging a gap down the next day if something happens overnight, though at least being +gamma will help a bit there.
or buy back the may calls on expiry day and simultaeneously sell the june calls? but that means crossing another spread and giving up the insane last day theta - i checked the market with about an hour till the close. the underlying was exactly $16 and the may $16 calls were 4.5/6.5c. you can't assume you'll get a fill at the mid, so you'd have to factor 6.8c as the cost to close out (with IB brokerage - i don't know if there's any better for ASX options?) obviously you won't get anything like that back from one day's theta on the june contracts a whole month out from expiry!
i seem to recall reading articles in the past suggesting that one is generally better off doing the latter. but i think they were based on US options, which would probably have much thinner spreads.
not a life or death situation. i let the may contracts expire (OTM as it turned out). i will sleep easy, and i will look to sell the june $16 calls tomorrow if the conditions suit. but i'm curious to find out, how do others approach this sort of situation, when dealing ASX options?