Options trading strategies for expiration day

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Develop and improve products. List of Partners vendors. A stock option gives the holder the right though not an obligation to buy or sell a stock at a specified price. This stated price is called the strike price.

The option can be exercised any time before expiry, regardless of whether the strike price has been reached. The relationship between an option's strike price and the market price of its underlying shares is a major determinant of the option's value. In the case of call options , if the stock trades above the strike price the option is in the money. Exercising the call option will allow you to buy shares for less than the prevailing market price.

However, if the stock trades below the strike price, the call option is out of the money.

It would make little sense to exercise the call when better prices for the stock are available in the open market. If you hold an out-of-the-money call, there's no reason to exercise the option, because you can buy the underlying shares cheaper on the open market. A call option has no value if the underlying security trades below the strike price at expiry.

A put option , which gives the holder the right to sell a stock at a specified price, has no value if the underlying security trades above the strike at expiry. As that moment approaches, unusual market forces create option price distortions, rarely understood by most investors. These distortions give rise to outstanding trading opportunities with enormous profit potential. Augen also discusses:. A must-read for individuals who are options oriented.

Not only does Augen present a set of effective trading strategies to capitalize on these anomalies, he walks through the performance of each across several expirations. His advice is practical and readily applicable: He outlines common pitfalls, gives guidance on timing your executions, and even includes code that can be used to perform the same calculations he does in the text.

Episodes on Expiration

A thoroughly enjoyable read that will give you a true edge in your option trading. Augen makes a careful and systematic study of option prices at expiration. His translation of price behavior into trading strategy is intriguing work, and the level of detail is impressive. In the swing trading strategy, short calls can be opened at top of the swing and short puts at the bottom, drastically reducing your market risk.

Options expiring in one week provide the best leverage, because time decay is substantial. When you write covered calls, longer-expiring contracts yield more cash, but on an annualized basis, your yield is always higher writing shorter-expiring short contracts. To annualize, divide the premium by the strike; then divide the percentage by the holding period; finally, multiply by 12 to get the annualized yield. Picking shorter-term short calls works just as well for ratio writes and collars. Spreads, straddles and synthetics at times of exceptionally high volatility. Any time you open up spreads, straddles or synthetic stock positions, you are likely to include open short option positions.

This tends to be very short-lived, so going short when premium are rich often produces fast profits in changes in option premium. Time decay happens very quickly during the last two months before expiration, so focus on short positions within this range.

Remember, just as time decay is a big problem for long option positions, it is a great advantage when you are short. Maximizing your advantage in times of consolidation. When the underlying is range-bound, timing is perfect for very short-term positions like the covered straddle.

It has to be monitored carefully, and a move of one side in the money should lead to prompt rolling or closing of the position.