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Option Trading Playbook Prior To Expiration

1) The document discusses option trading on expiration dates, noting that the final hours are characterized by unusual market forces and price distortions that provide trading opportunities. 2) It recommends waiting until after 10AM CST and 1PM CST to place trades, as implied volatility collapses later in the day after large positions have been unwound and stocks stabilize near strike prices. 3) Short positions designed to benefit from implied volatility collapse generally perform best late in the trading day under these conditions.

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Ravi Raman
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196 views2 pages

Option Trading Playbook Prior To Expiration

1) The document discusses option trading on expiration dates, noting that the final hours are characterized by unusual market forces and price distortions that provide trading opportunities. 2) It recommends waiting until after 10AM CST and 1PM CST to place trades, as implied volatility collapses later in the day after large positions have been unwound and stocks stabilize near strike prices. 3) Short positions designed to benefit from implied volatility collapse generally perform best late in the trading day under these conditions.

Uploaded by

Ravi Raman
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Option Trading Jan 25th Expiration

1) Waited patiently till 10 AM to place trades

1) Short positions designed to benefit from implied volatility collapse perform best late in the day
after the stock stabilizes near a strike price and most large positions have been unwound
2) Use the IV Trend to assist you in placing trades. Best to wait till 10 AM CST, and after 1 PM
CST

Thought that ES would retest recent highs of 2677 and shorted 2660 put
spread at 2666. Swing target for recent congestion was at 2671 but got scared
that market may spike higher to 2677.

Sold 2670 calls and got scared and covered for $800 loss when ES moved
above 2670. Learning: Trade smaller positions so that you don’t get shaken
off

Sold 2680 calls that I covered for a $1100 profit. Learning: Too much size

Sold 4 NFLX 335/340 calls or 1.5 credit. NFLX showed a lot of strength and I
had to cover for a loss. Had a big loss which reduced since the stock corrected
and because of IV/time decay

Sold 3 GOOG 1092.5/1100 call spread. Covered later for a $330 profit. Could
have held to expiration

Sold 2 AMZN 1680/1695 calls. Stock was volatile and the premiums didn’t
budge much. Small profit of $100

-800+1100 +330+100

Equity and index options expire on the third Friday of each month. The final hours of each expiration
cycle is characterized by unusual market forces and price distortions that provide outstanding trading
opportunities. These distortions are caused by the breakdown of traditional option pricing calculations
that depend on volatility and time decay to represent risk. As a result, options are unavoidably mispriced
during the final few days.

These End-of-cycle price distortions represent a market inefficiency that can be easily be exploited by
individual traders rather than large institutions for reasons related to liquidity and execution efficiency.
Market Forces
End-of-cycle effects that are not comprehended by contemporary pricing models fall into three categories:

o Implied volatility collapse on the final trading day


o Strike price effects, including “pinning”
o Rapidly accelerating time decay

Close scrutiny of the charts reveal that implied volatility becomes more unstable when options are in-the
money. Almost invariably, simple short positions designed to benefit from implied volatility collapse
perform best late in the day after the stock stabilizes near a strike price and most large positions have been
unwound

The implied volatility profile reveals distinct intervals that can be used as the basis for structuring trades.
The first is characterized by stable or slightly rising implied volatility. It begins at the open and continues
until 11:00 EST. At this point, volatility drops quickly from 30% to 20%, where it remains stable until
14:00 EST. The final era of the chart is characterized by a sharp steady decline in implied volatility that
continues until the close. Overall there were two stable periods and two periods of rapid decline

Key Takeaway:

3) Short positions designed to benefit from implied volatility collapse perform best late in the day
after the stock stabilizes near a strike price and most large positions have been unwound
4) Use the IV Trend to assist you in placing trades. Best to wait till 10 AM CST, and after 1 PM
CST

That said, trades that rely on implied volatility collapse are not without risk. As always, timing and risk
management are important success factors.

Further minute-by-minute analysis reveals that 38% of the strike crosses occur before 12:00 and 76%
before 14:00. In most cases, it makes sense to close a winning long position with a modest profit, which,
on expiration day, is commonly more than 50%.

Sample IV Trade:

GOOG at 538. 90 minutes to Expiration. Buy 530 calls and sell 3X Ratio 540 calls and hold to expiration

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