Dangerous strategy on expiration

R

rickf

I was talking with a trader at the gym this morning -- he says sometimes he sells an OTM bull put/call spread ON EXPIRATION DAY toward the end of the trading day in the hopes of collecting a little premium from OTM options.

I told him I thought it was a risky bet; that even if you're very sure that the 4PM closing price would be away from your short strikes, you could get burned in the last minute or two of trading as folks wrapped the month up to include any price movement in the afterhours...and it wasn't a 'safe' strategy, even if you might -might- be able to pick up a few bucks on premiums now and then. Hell, you might not get a fill, for that matter.

He said it was no problem because as long as the 4PM closing price was away from his short strike, the stock could move anyway and he'd be okay, and "besides" he only does this thing right into the close of trading.

I still maintain that was/is a risky strategy and sure as heck wouldn't do it myself. Am I correct in that assessment?
 
"He said it was no problem because as long as the 4PM closing price was away from his short strike, the stock could move anyway and he'd be okay"

Incorrect. If there was a significant event, he could be assigned and find that on Mon opening that he can't sell it for anywhere near what he paid.

A lot of small winners, but when it goes bad, could be significant loser.

Joe.
 
Quote from u21c3f6:

"He said it was no problem because as long as the 4PM closing price was away from his short strike, the stock could move anyway and he'd be okay"

Incorrect. If there was a significant event, he could be assigned and find that on Mon opening that he can't sell it for anywhere near what he paid.

A lot of small winners, but when it goes bad, could be significant loser.

Joe.
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My point exactly. Even in the last minute or two of trading, there's always chance for a reversal and getting caught "assignable". Sure you might get some winners but IMO the risks outweigh the benefits.
 
Quote from rickf:

I still maintain that was/is a risky strategy and sure as heck wouldn't do it myself. Am I correct in that assessment?
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You are absolutely correct in your assessment. There's a reason people close out shorts for a nickel on the third Friday - that's not the time to be opening for a nickel.

The problem with strategies that are successful nearly all the time is that people do it a few times for profit and delude themselves into thinking there's no risk. Usually, the higher the chances of success the greater the cost of failure when it (eventually) occurs.

It's all fun and games till someone gets assigned.
 
This strategy is much "safer" when done with the indices.

I have picked up a few dollars here and there with the OEX.

But, it is somewhat risky - a strong move in the final minutes will put you underwater fast.

You have to ask yourself if it is worth it to risk A LOT to make a little.

AZD
 
The nickel bids stack up from all the closing trades and they get priority when the series trade a a nickel too. Selling nickels is not a really good idea. I suspect your pal at the gym is a neophyte.
 
Just look what happen to all those people last expiration when the fed cut the discount rate on friday before the open. The settlement price of the S&P 500 for all options is the price of friday's open. Alot of people got burned selling otm calls thursday before the close.
 
Quote from ellevers:

Just look what happen to all those people last expiration when the fed cut the discount rate on friday before the open. The settlement price of the S&P 500 for all options is the price of friday's open. Alot of people got burned selling otm calls thursday before the close.
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Yes, that SPX settlement is very tricky.

The "safer" choice is the OEX.

For example, right now, with about 50 minutes to go, there is a bid for the 695 puts (and more for the 700 puts) with the OEX at 705. You want to take the chance that the OEX won't fall 1.5% more in that time? If so, (and again NOT a recommendation), you can sell a few.

Good luck.

AZD
 
I guess it's no secret by now that the market can go horribly, horribly wrong in the final hour of trading.

Gonna take some people an awful lot of nickels to make back today's losses.
 
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