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Trading Options at Expiration
- Thread starter xicaju
- Start date
I seem to recall Augen's article, especially the part about pinning. I believe he mentions that pinning occurs in the AM, for that is when the market makers and other large traders are exiting the open positions. they exit and move on, for wasting the PM session holding on the "penny" options is foolish for them. This is probably why the IV tends to go up in the AM. Once the AM activity is complete, the only people left are the small traders. That is probably why the IV drops, for we usually allow the OTM options to expire. So, I do agree with the observations previously mentioned on expiration day.
It's not rocket science or anything....
As a slight variation from Augen's book which focuses on expiry day.
Grab historical quotes on the typical pinning suspects..grab expiration day minus say 5-7 trading days...so for each expiration day you should have about 5-7 days of history...grab how ever many years of historical data you are comfortable with.
Might be best to do this in Excel...then in the column next to the close prices, write a formula to determine how many times the closing price crosses the next closest strike (assuming $5 strikes, if next closing price is < or >$5, then it crossed, else is the next price <> $5, etc..etc..)
Then - make excel tell you how many times in the past 5-7 days before expiration the underlying crossed a the strike on each day, how many times it crossed two strikes on each day, etc...
The point is to find an underlying you like that exhibits fairly consistent pattern/behavior entering expirations (remove earnings periods).
For example supposed you find that stock XYZ has never crossed more than two strikes within 6 days of expiration, ever, in the past five years..then you see that the calls or puts 3 strikes out still trade for a dime or a quarter...
It's a bit of effort, but once it's in place you can pull quotes from yahoo, drop them in your spreadsheet and find something you like. I realize 10-25 cents isn't much premium, but if there is a 99% chance (based on last 5 years data) the underlying never crosses three strikes out...then it's statistically a high prob. trade.
Anyway - I hope someone gets something out of this. There are candidates that meet the criteria, just not hundreds..an yeah, it's the obvious suspects...
This little exercise also confirms that the person on the other side of the trade didn't bother doing their homework....or are not concerned with losing a quarter a contract.
As a slight variation from Augen's book which focuses on expiry day.
Grab historical quotes on the typical pinning suspects..grab expiration day minus say 5-7 trading days...so for each expiration day you should have about 5-7 days of history...grab how ever many years of historical data you are comfortable with.
Might be best to do this in Excel...then in the column next to the close prices, write a formula to determine how many times the closing price crosses the next closest strike (assuming $5 strikes, if next closing price is < or >$5, then it crossed, else is the next price <> $5, etc..etc..)
Then - make excel tell you how many times in the past 5-7 days before expiration the underlying crossed a the strike on each day, how many times it crossed two strikes on each day, etc...
The point is to find an underlying you like that exhibits fairly consistent pattern/behavior entering expirations (remove earnings periods).
For example supposed you find that stock XYZ has never crossed more than two strikes within 6 days of expiration, ever, in the past five years..then you see that the calls or puts 3 strikes out still trade for a dime or a quarter...
It's a bit of effort, but once it's in place you can pull quotes from yahoo, drop them in your spreadsheet and find something you like. I realize 10-25 cents isn't much premium, but if there is a 99% chance (based on last 5 years data) the underlying never crosses three strikes out...then it's statistically a high prob. trade.
Anyway - I hope someone gets something out of this. There are candidates that meet the criteria, just not hundreds..an yeah, it's the obvious suspects...
This little exercise also confirms that the person on the other side of the trade didn't bother doing their homework....or are not concerned with losing a quarter a contract.
...only problem is that collecting those 25 cent premiums ...will work and work and work...until the one day it doesn't and you lose everything you made and a LOT more.
RE: gavitation toward a stike at expiration --- well a large factor will be holders of premium who are gamma scalping. As the day wears on they have to be content with less and less range. So as they get very long at strike plus 10 cents they sell....then at just under the strike they are very short so they buy.
RE: gavitation toward a stike at expiration --- well a large factor will be holders of premium who are gamma scalping. As the day wears on they have to be content with less and less range. So as they get very long at strike plus 10 cents they sell....then at just under the strike they are very short so they buy.
Sure - anything can happen, and there is always a first time for everything.
and like is always said -- past performance is no indication....
That said - there are allot of special situations on or near expiry to capitalize on. It is not my primary plan, but when the opportunity exists, I do take advantage of it.
Pull the data, and run the numbers. There are more than a handful of underlying that have never moved three strikes in five days, but people still buy puts for example on Monday of expiration for .20-30 each...maybe not knowing, that never, since the stock has traded, has it ever moved 15 points in 5 days.
This is just a macro view of Augen's micro-proposal of trading only on expiration. He uses tick data on the options, determines the probability of a given underlying crossing a strike at different times of the day. As someone previously mentioned, the data favors long positions until around lunch time, then short - for a handful of highly liquid stocks that he focuses on.
I put an example of one of the stocks, I found that had a high probability of uniform behavior during expiration week below:
http://screencast.com/t/NDFhODRhNTEt
I am certainly not suggesting anyone take my word for it...do your due diligence, decide for yourself if it fits your style of trading.
No trade is 100%, and if it is, your trade could be the one that makes it 99.9% profitable, that said, I lean strongly on probability and statistics when entering trades like this.
and like is always said -- past performance is no indication....
That said - there are allot of special situations on or near expiry to capitalize on. It is not my primary plan, but when the opportunity exists, I do take advantage of it.
Pull the data, and run the numbers. There are more than a handful of underlying that have never moved three strikes in five days, but people still buy puts for example on Monday of expiration for .20-30 each...maybe not knowing, that never, since the stock has traded, has it ever moved 15 points in 5 days.
This is just a macro view of Augen's micro-proposal of trading only on expiration. He uses tick data on the options, determines the probability of a given underlying crossing a strike at different times of the day. As someone previously mentioned, the data favors long positions until around lunch time, then short - for a handful of highly liquid stocks that he focuses on.
I put an example of one of the stocks, I found that had a high probability of uniform behavior during expiration week below:
http://screencast.com/t/NDFhODRhNTEt
I am certainly not suggesting anyone take my word for it...do your due diligence, decide for yourself if it fits your style of trading.
No trade is 100%, and if it is, your trade could be the one that makes it 99.9% profitable, that said, I lean strongly on probability and statistics when entering trades like this.
Some really good points here. I actually placed a trade on the last trading day before quarterly expiration. This was September, 2009. The last trading day was Thursday, the day before the third Friday. At the close, the Sep Futures was between 2 strikes (strikes have 5 point intervals. The options expire at 9:30AM EST at the open of the cash market. A "special opening quote" is printed shortly after the open, based on the cash prices of the S&P 500. Any way, I placed 7 strangles, using the nearest strikes ( I don't remember the prices, but something like 7 short 1090 puts @4.25 and 7 short 1100 calls@ 4.25 with a multiplier of 50, with the futures closing around 1095). My premise: The S&P rarely opens 5 points above its previous close during this particular time period. This trade required $35K in margin. I was set to make $3K if the opening occured within the interval. Of course, this time it opened 2 points above the short call. So, I ended up with $2300.00 instead of $3k. To me the trade was worth because of the amount of time value present.
Quote from Mark Anthony:
...only problem is that collecting those 25 cent premiums ...will work and work and work...until the one day it doesn't and you lose everything you made and a LOT more.
RE: gavitation toward a stike at expiration --- well a large factor will be holders of premium who are gamma scalping. As the day wears on they have to be content with less and less range. So as they get very long at strike plus 10 cents they sell....then at just under the strike they are very short so they buy.
That is the exact same fear I have with selling options. There is a small some to be made on a consistent basis, but one huge move in one of the stock could completely wipe out all the previous profits.
Muthiah....
...hey, it's good to be feaful when selling option premium.....the short premium guys are the one who blow out........you can lose money holding premium, but at least you take blow out risk off the table.
I like the --" this underlying I have studied never moves 2 standard deviations in a week....so I'm going to collect all this premium. Boy am I clever."
The impossible happens with alarming regularity in the markets.
Read Taleb or Wilmot - both really understand risk.
...hey, it's good to be feaful when selling option premium.....the short premium guys are the one who blow out........you can lose money holding premium, but at least you take blow out risk off the table.
I like the --" this underlying I have studied never moves 2 standard deviations in a week....so I'm going to collect all this premium. Boy am I clever."
The impossible happens with alarming regularity in the markets.
Read Taleb or Wilmot - both really understand risk.