Friday, July 17, 2009

Trading Options Expiration Days

I had just about decided to stop trading options expiration days when I read Jeff Augen’s Trading Options at Expiration: Strategies and Models for Winning the Endgame (see Another Winner from Jeff Augen for more details), which inspired me to consider a number of potential new options expiration strategies.

As a trader, I am acutely aware that my aggregate P&L for options expiration days is a net loss. It is not just the fact that I have always found it difficult to be consistently profitable on options expiration days that has bothered me, but it has also been the frustration of seemingly having to maintain one set of rules for 240 trading days per year and another set of rules to deal with a completely different set of opportunities and hurdles presented once each month.

The bottom line for me is that it is not worth it to day trade options expirations days and let’s face it, who doesn’t need an extra day off each month. Further, why bother with the day before FOMC announcements, when trading is typically lackadaisical at best? With options expirations every month and FOMC meetings every six weeks, this means 20 additional vacation days a year – perhaps even paid for by cutting trading losses.

I encourage every trader to check their track record on options expirations days and FOMC announcements days to see whether they should be entitled to 20 extra vacation days. Don’t stop at these two slices, perhaps your strategies do not work well on the day before holidays, the week after options expiration, the first week of each month, Wednesdays (crude oil inventories), Thursdays (jobless claims), the day you have dental appointments or whatever.

Not all days are created equal and if your edge isn’t there on certain days, perhaps you should not just step away from the keyboard, but hop in the car and go have some fun with all the money you are saving.

[A number of readers have asked where I took this photo. It is from Battle Rock Beach at Port Orford, Oregon. I took this particular shot on a bluff overlooking the beach. Later on I discovered that a local B&B just happened to have a webcam with a similar perspective: Battle Rock Beach webcam]


Anonymous said...

Anybody interested in reading this Jeff Augen’s book may also consider reading his "The Volatility Edge in Options Trading: New Technical Strategies for Investing in Unstable Markets." This book discusses option expiration cycles and also how to trade earning cycles where he shows how volatility crashes soon after the earning realize. The latter topic has been very well illustrated by Dean Mouscher on his where he discusses "What is Options Worth."
Having traded options for 12 years, I am yet to come across a better book then Jeff Augen's.

Bill Luby said...

I am in agreement with you on Augen's first book, which I gave a Best New Volatility Book Award to last year.

Also, based on what I have seen from Dean Mouscher, I suspect I will be recommending his work on a regular basis as well.



Anonymous said...

What Jeff hasn't pointed out in either of his books is WHY there are wild gyrations on the last 2 days (or week) of expiration cycle and also the impact of program trading on option expiration cycle.
1. Why wild gyrations - often times market makers square their positions before expiration cycle that leads to buying and selling of position to net their positions. This results higher volatility, inflating the price of options, and that's where option traders come in to squeeze out the weak hands.
2. Program trading - We all know that about 70% of equity trading today is done by black box. But how about program trading in options? About 15% of option trading is done by program trading, especially the expiration cycles and earning cycles (don't have a source to back up this data but I recall this data from CBOE). These algorithms are especially designed to take advantage of market makers squaring their positions. (Jeff has written thousands and thousands lines of programing code for trading both earnings and expiration cycle).

Having said the forgoing, even after 12 years of option trading, I cannot say with certainly or pin-point the exact reasons. This is something to ponder on, if one aspires to be an options trader.

Anonymous said...

too bad i avoid biotech stocks, otherwise i had even more vacation days. they have all those clinical test results, FDA approval process, and medical research opinions. too much volatility there.


Justin said...

Thanks for the book tip guys, I am just getting into naked puts and strangles and love the IV crush!

John said...

Nice post, and I am going to read Augen's and Mouscher. Two thoughts before I do:

1) I agree that expiration day should at least be a "mental health day" spent mostly organizing the office or paying bills. Pins, penny assignment&exercise, and gamma - who needs to worry about all this: Between dealers who have to be more aggressive with their own books and other players who can trade much more quickly then we can, I do everything I can to get our positions out of front month and into another cycle at least a week before expiration week. There is just too much event and gamma risk to ride out expiration with white knuckles. Reduce your stress, roll into more time and look for strategies measured in something other than minutes until Friday's close.

2) Expiration days are an excellent time to plan to trade ahead of buy-write indices or other investors who are only going to sell away at the new front month the following week. Plus, I believe there to be some nice arbitrage opportunities on the new short-term months (like SEP next week for JAN and FEB cycle stocks) with rolls from AUG for another 28 net days. I already have my list of open AUG short call contracts that can be moved to SEP next week.

Nice article on gamma and closing positions before the math gets dangerous can be found here:

Fff said...


Let me send you some charts.
Dax - Medium term
Between the range. Nothing new medium term.
Nice video.
SPX 500 - Range, so Nothing New This Week
Big trades for you and for all

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