Read the ultimate guide on how to trade on expiry day along with some tips and tricks to help you with expiry trading. In this guide, you’ll learn what the expiration day is and all the basic stuff you need to know before you get started. Additionally, we’ll share 3 easy and powerful expiry trading strategies with real trades.
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Expiry day occurs when an options contract expires. It’s a well-known fact that the most important day in stock trading is the expiry day. As this day approaches, options contracts will almost always see a measurable increase in trading activity. Options expiration day can have a big impact on the stock price which is why stock investors pay close attention to trading options on the expiration date.
Now, the big question is this:
How stock traders can benefit from expiry trading regardless of where the stock market goes?
There are many ways to skin the cat and that’s why we’re going to share with you various expiry trading strategies to generate a profit during the expiration day.
Let’s start by explaining what is the expiry date in the stock market and explain why the expiration day attracts so many traders.
What is Expiry Day in the Stock Market?
In the stock market, the expiration day also called the last trading day, is the day a derivative contract such as futures vs options expires. On or before the expiration date traders can choose to exercise that option and realize the profit or loss, or alternatively, you can let the options expire worthlessly.
In other words, the expiry day is the date the options contract becomes invalid.
Note* It’s estimated that over 90% of all options contracts expire worthlessly and only 10% are exercised.
In the United States, the expiration date is on the third Friday of the contract month. In total there are 4 expiration months: January, April, July, and October. For options trading most commonly we have three basic types of expiration cycles:
- Quarterly-expiring options that expire the last business day of each financial quarter.
- Monthly-expiring options that expire every third Friday of each month.
- Weekly-expiring options that expire every Friday of the week.
Note* To keep track of the expiry day, it’s helpful to use an options expiration calendar.
Keep in mind that there are also options that expire daily, but they are not that liquid.
Some foreign stocks will expire on different days. For example, the expiry date for the Indian stock index NIFTY50 is on the last Thursday of the expiration month.
Stock options can also fall under three different types of expiration cycles:
- JOJO cycle has the first month of each quarter as the expiration month (January, April, July, and October).
- FMAN cycle has the second month of each quarter as the expiration month (February, May, August, and November).
- MJSD cycle has the third month of each quarter as the expiration month (March, June, September, and December).
Let’s explore why the expiration date is important, as this will allow you to better understand the whole process of trading around the expiration date.
Why Expiry Trading Works
All expiration days are very active trading days because all cash-settled futures are closed at the settlement price. Or, alternatively, stock investors can roll over their contract to the next expiry contract.
So, what really happens on expiry in the stock market?
In simple terms, we’ll see more volatility.
This is good news, especially if you’re day trading.
Here are more insights into what goes on behind the scenes:
Usually, the stock price tends to gravitate towards particular prices at the expiration date, a situation known as the theory of maximum pain. Basically, the theory says that stock prices will gravitate towards the strike price where the biggest chunk of the options contract will expire worthlessly.
In other words, the maximum pain price can be found where options contracts are worth the least.
In this scenario, if you bought options they will be worthless. However, if you write or sell options, you benefit from low-value options.
Let’s examine how the expiry day options trading strategy works.
How to Trade on Expiry Day
As a general rule trading options near the expiration day you want:
- To be more diligent in making money off the table and close positions that are profitable.
- Second, closing out positions that are deep in the money.
As we get closer to the expiry day, your risk of assignment, especially if you’re in the money, goes up. But, as we get further into the expiration week, the assignment risk goes dramatically higher.
Below, we’re going to explain how options buyers and options sellers profit from the expiry day:
- Options buyers at expiry date: The most common expiry trading strategy used is to buy options with multiple strike prices. This will increase the chance the stock will move in their favor and expire in the money before expiration. Usually, the options premium is very cheap due to time decay.
- Options sellers at expiry date: Options sellers look at things in reverse. The expiry trading strategies used is to sell multiple near strike prices to collect as much premium as possible. Options sellers will sell OTM options with the hope they will expire worthlessly.
However, the truth is that these expiry trading strategies carry a high-risk level. To minimize these risks, you will need to plan your expiry trading strategy carefully.
Expiry Trading Strategies
If you trade options, you’re basically trading in and around expiration. Traders use different expiry trading strategies to exploit options at expiration, and we’re going to examine the good, the bad, and the ugly of holding positions to expiration.
Trading options near expiration is not that challenging once you get a grip on a few stock trading tips and tricks.
Unlike futures trading or stock trading where most trades are directional, most options trades are non-directional bets. The implication can be very profound as this means we don’t have to time entries with precision. There will be some room for error, which can be very beneficial.
Expiry Day Trading Strategy
Since 90% of options expire worthlessly, we have a statistical edge to sell options at expiration.
If we sell options in 90% of cases, you’ll pocket the profit 100% of the time if the options expire worthlessly.
Our favorite instrument to sell options on expiration day is the S&P 500 ETF SPY because it has multiple expirations each week. This creates more opportunities for trading and, as a direct result, makes it easier to generate profit.
We hope this step-by-step day trading ETFs guide will get you familiarized with ETF trading strategies.
Here is our approach to selling short-term options:
- Look for a possible intraday top and then sell a bear call credit spread (or a bear call spread). With this strategy, you’ll profit if the underlying stock price drops.
- Look for a possible intraday bottom and sell a bull call credit spread (or a bull call spread). With this strategy, you’ll profit if the underlying stock price rises.
In simple terms, a bear call spread involves purchasing two call options (long and short), with different strike price and the same expiration date.
This strategy profits you by simply calling an intraday top or bottom for the day.
Options Gamma Trading at Expiry Day
What really drives options at expiration is the Gamma factor. Gamma is part of the four factors that measure risk. The options Greeks (delta, gamma, vega, and theta) is the term used to describe these risk parameters.
You need to have some sort of understanding of the options Greeks if you want the expiry day options strategy to work.
In simple terms, Gamma measures the rate that Delta will change based on a $1 price movement in the stock price. At the same time, Delta measures the rate of change or the speed of the options price relative to the move in the stock price.
Gamma simply answers the question:
How much does the option price move if the stock price moves $1?
For example, if a stock option has a delta of 0.45, and the underlying stock price increases by $1 per share, it means that the option value will increase by $0.45 per share. If gamma is 0.1 or 10%, then the options price will be adjusted by 10% from $0.45 to $0.55.
Now, you might be asking yourself:
How can I effectively trade on expiry day?
Usually, gamma will explode around the expiration cycle and most experienced traders will likely be buyers right before the expiration. Selling options around expiration is harder because it’s impossible to manage your risk.
Think about that next time you want to trade options at the expiration cycle.
Our approach is to use gamma neutral options strategies.
This approach is extremely helpful because it secures profits and at the same time makes additional profits as the volatility increases.
The goal of the gamma neutral options strategy is to bring the gamma near zero by using a combination of different options trades. Read our guide on how to find profitable options trades.
In many cases, establishing a gamma neutral position might be beneficial. There are endless possibilities to establish a gamma neutral position and it all comes down to your objective. Use the table below as a reference:
Here is a trick you can use to bring gamma to neutral:
- First, check the gamma for each option.
- Take the gamma of the option you’re selling round it up so you have a number with decimals and multiply it by 100 to find the options you need to buy.
- Take the gamma of the option you’re buying round it up so you have a number with decimals and multiply it by 100 to find the options you need to sell.
For example, if you buy the calls with a $45 strike price (gamma of 0.155) and sell calls with a $50 strike price (gamma of 0.075), how much we need to buy of each option to neutralize gamma?
Applying the above tricks, we would need to buy 75 $45 calls and sell 155 $50 calls.
Now, let’s check the gamma and see if we’ve managed to neutralize it:
- Buying 75 calls with a gamma of 0.155 is a gamma of 75 x (0.155 x 100) = 1162.5.
- Selling 155 calls with a gamma of 0.075 is a gamma of 155 x (0.075 x 100) = 1162.5.
Since we’re buying and selling, the gamma neutralizes itself to a net gamma of 0 (1162.5 – 1162.5).
Our last options expiration day strategy is outlined below:
Friday Expiration Straddle Strategy
When to use the straddle options strategy?
If you think on the expiry day something big is going to happen then you can take your chance at the straddle options strategy.
If you want to better understand the straddle strategy and profit from big moves check our guide on Straddle Options Strategy.
In simple terms, the straddle is a neutral strategy that involves buying (or selling) a put option and a call option at the same time, with the same strike prices and the same expiration date.
Buying a straddle at expiry day can be appealing due to the potential big profits relative to a small initial investment.
Now, you have to keep in mind that the straddle only works if the market makes a big move.
Additionally, it’s logical to think that “the potential of big profits” implies that we would have a lower probability of success. Opportunities to make big profits don‘t happen every single day.
That’s the reason why we encourage you to exercise caution with this strategy.
Instead of just randomly buying straddle at the expiration and hope we’ll make a profit, we only want to buy straddle when the volatility is higher than average. This will further improve the odds of success. Check out our successful trader quotes!
Furthermore, stock selection is another thing we can work on to gain an even better edge. Companies that have earnings reports can influence the implied volatility of an option thus giving us a better chance to succeed.
Final Words – Expiry Trading
In summary, our expiry trading strategies work in all types of market environments (up, down, or ranging). Overall, we found that short premium options strategies are more likely to perform better and subsequently are more profitable.
Learning how to trade on expiry day can be achieved by everyone. We recommend you first test these expiry day strategies on a demo account before you risk any of your real money.
To wrap thing up, here is a short summary of the things you’ve learned:
- Options expiration day can have a big impact on the stock price action.
- Stock prices tend to gravitate towards particular prices at the expiration date.
- Expiry day trading strategies: bear call spread and a bull call spread.
- Gamma neutral options strategy.
- Friday expiration straddle strategy.
If you want to get a wider view of the subject you, we can recommend one of the best expiry day trading books: Trading Options at Expiration: Strategies and Models for Winning the Endgame by Augen Jeff.
Thank you for reading!
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