Option Strategy on Options Expiration Day

Today's Topic: Option Expiration Strategies

Dear Options Trading FAQ:

Do you have any favorite OEX Index Option strategies to take advantage of the increased volatility during expiration week, especially the last few days when the option premiums start to rapidly decay?

Expiration Day Player

Dear Options Expiration Fan:

Ahh, options expiration day.... When month-old dreams struggle till the closing minutes to stay alive. When out-of-the-money OEX options are eagerly sought out at 3:45 with the release of market-on-close indications. What excitement, what sadness.

Option expiration day is when the true option enthusiast comes out to play. One very popular OEX play is to watch the out-of-the-monies at the end of the day for a long side buy with the hope of a closing run-up. These players start their buying at 3:45 with the release of MOC indications. This is risky in that these out-of-the-monies will certainly collapse totally when it becomes apparent that there will not be a run-up.

The more conservative play is to buy in anticipation of positive indications and then to sell into the resulting rally (not sticking around for the after market run). Note: most months this strategy will result in a total loss of the premium. The fans of this approach say that with proper choosing of months in which to try this, the spectacular successes will outweigh the long dry spells.

The option trading pros like to “fade” the MOC blips. That is , market insiders will gladly sell the out-of-the-monies to the public in hopes of collecting all the premium. Of course, most of the time this will work out for them, but once in a while, there will be hell to play. A stop-loss buy is a must in these short positions. Private investors like to try this on a smaller scale but naked margin requirements make it difficult to do enough to make it a good proposition.

Option sellers like to establish positions a week or so before expiration to take advantage of the great decay in time value during that last week end before expiration. This is particularly appealing to short spread traders using as a hedge in-the-money current month options or, more conservatively, next month’s options. The short spread approach is an excellent idea for most expirations, but one must be willing to close it down to take one’s profit before the close if one feels the possibility of expiration fireworks.

Option day traders are in hog heaven during expiration week with the increased volatility. A good indicator for a choppy, ranging expiration week include the RSI (Relative Strength Indicator) Chart. Use plenty of stops whether trading long or short.

I could go on and on but I don’t know if I’m getting in too deep for the rest of the forum. Others can let me know or send me questions.

Good luck and trade well! Remember, an educated options trader is the best options trader. Browse these books books on trading options.

Tags: Options Trading, Options Expiration, Options Strategy

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