Underpriced SPX options at expiration

[FSU]

In my opinion SPX options (pm settled) have been underpriced very close to expiration (last 10 to 30 minutes). For example Friday the 2180 puts were trading around .20 with 10 minutes to go and the index was around 2181. This gives you tremendous leverage with very low risk. (They ended up worthless, but traded up to about 1.80)

My play has been to buy (mainly the puts) when they are within a couple of dollars out of the money and trading around .20, depending on how much time is left. I generally buy a 10 lot. I then offer a few out around 1, and also offer the put strike above (in the above example at 6 for the 2185 puts) for a few more. This will allow an additional profit if you are filled and the market turns as it did Friday. I will keep the last few options in case the market continues to fall. On Friday you would have been filled at 6 on the 2185 puts and they went out at 4.

Depending on how much the market moves, this only has to work out around 1 out of 10 times. In my experience it works out more often then this. For those of you who are looking at new trading ideas, take a look on Monday's expiration (and Wednesday's and Friday's)

 

[daniel5198]

In what year was the SPX 2181?

 

[FSU]

In what year was the SPX 2181?

Ha, yes should be 2581, too late to edit original post

 

[samuel11]

I do this as well. Relatively cheap way to get some gamma.

 

[sle]

In my opinion SPX options (pm settled) have been underpriced very close to expiration (last 10 to 30 minutes). For example Friday the 2180 puts were trading around .20 with 10 minutes to go and the index was around 2181.

Are you using some sort of expiration level prediction or trading them on break-even basis only?

 

[FSU]

Are you using some sort of expiration level prediction or trading them on break-even basis only?

No prediction. Much more of an art than science. The options just look cheap to me and I try to make about 5 times my money on half of the options, letting the others run.

Would be an interesting back study for someone more technically oriented then me.

 

[lawrence-lugar]

Why are you talking about your good strategy...
Do it, and report back here from your yacht about the boat loads of money you made.

I'm not being sarcastic or anything or saying whether it works or not...or whether you'll succeed or not -- but just saying.
Why blabber about your heist plans,

But you're right on it being more of an Art, than a science. If you trade within a day, or a very shorter time frame than swing trading or investing...the Art/skill/intuition part plays a much bigger role.

 

[FSU]

Why are you talking about your good strategy...
Do it, and report back here from your yacht about the boat loads of money you made.
.

@lawrence-lugar, This is a strategy I have been doing for some time. It has been successful. It is one of the many types of trading strategies that I do. I find these types of trades come and go, now premium is cheaper then I think it should be, later on that might not be the case at the end of the day.

I thought others might be interested in trying new things or at least looking at them, that's why I posted, especially as I don't believe it will hurt my opportunities here.

 

[Sig]

Thanks for bringing this up @FSU. For those out there that have been an options MM, do you make a market right up to expiration? If not, when do you generally stop quoting? I would think the models would start to break down a few minutes before expiration?

 

[FSU]

Thanks for bringing this up @FSU. For those out there that have been an options MM, do you make a market right up to expiration? If not, when do you generally stop quoting? I would think the models would start to break down a few minutes before expiration?

I was a MM for 25 years in the OEX, quoting electronically for the last two of those years, before I left the floor. For the time I quoted electronically, I would stop about 10 minutes before the close on expiration. You are right, the models broke down in the last minutes of trading on expiration as prices are now driven by the underlying rather than futures. This really gives you some interesting opportunities today in the indexes like the SPX, especially in the last 30 seconds or so of trading, where the MM's model is not modeling the change in the underlying properly.