5 Rules For Trading Monthly Expiration

2016-01-14 | Henry Gambell

As options traders there is 1 day out of the month that usually carries a bit more weight than others, monthly expiration. This is the 3rd Friday of every month and tends to get trader’s attention as contracts in this series either have to be closed or rolled to a further dated expiration. That’s typically a good idea when you’re approaching the market from a swing trading perspective, but what if you don’t mind trading options that expire in 1 or 2 days? Here’s a few bits of advice that may keep you from making common mistakes.

  1. First, try not to buy options during the week of expiration. If you’re trading contracts that expire in 3 days theta decay will move exponentially and you don’t want to be on the wrong side of one of the only known factors in trading.
  2. Second, keep your position size small. This can be said several different ways and we’ll touch on that again in point #5, but remember that this week tends to be choppy, and as of late choppy to volatile. You don’t want to be on pins and needles here and you don’t want to be shaken out of your position.
  3. When trading monthly expiration focus on big, liquid products. The JPM’s, C’s and AAPL’s of the world are good examples. These tickers not only tend to pin a bit better, but they also have the liquidity you need to get out on Friday when expiring contracts in ill-liquid products may not be as easy.
  4. What is pinning? Pinning is based off the idea that most purchased options will expire worthless. This tends to work better on monthly contracts and while these levels aren’t quite as magnetic as they were years ago, they’re still worth considering in your analysis.
  5. Give yourself room to adjust. This is a similar concept to starting with small size, the primary difference being you don’t have to add to your original idea exactly. If that call spread you sold is starting to give you too much heat, add on the short put side. This neutralizes your delta while tacking on a bit of positive theta decay and makes the position easier to manage that if you’d started off with full size with a directional bias.