Taking Advantage of Every Opportunity: Top 5 Reasons to Trade Monthly Options Expiration

2017-07-20 | Danielle Shay

“The key is to understand the game, and then work continually to put the odds in your favor.” – JC

Trading options is a race against time, with time being an undeniable factor that you absolutely want on your side. Of course, our traders are highly directional in nature. We love nothing more than catching explosive moves to the upside (or the downside), and we have a specific set of strategies that we use to do so. However, trading monthly options expiration is a different beast. The choppy, back and forth action that typically comes this week gives us a whole new host of opportunities that we love to take advantage of. As John states, “It’s all about taking advantage of the opportunities at hand, specifically from people who don’t know what they are doing. There are a lot of ways to play that are low risk, and quick in nature. Suck that premium out of the market, thank you very much!”

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Sure, directional trading is what we love – who doesn’t like your options multiplying over night? but check out the calendar below. With one options monthly expiration per month, that’s 12 weeks per year that we can concentrate and make money off this specific set of strategies. “Identifying solid opportunities where we have an edge, putting our cash in the right place, and taking advantage of that is what we wake up and do every day,” states Henry.

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Where does our opportunity lie? Through volatility (or lack thereof), the Greeks, price movement, time decay, and careful strike selection.

1.Theta decay – 

Taking on positive theta positions that decay overtime is a great way to slowly gain income overtime using options, and monthly expiration is a great time to do that because it is when decay is most rapid. Selling options, particularly credit spreads, iron flies and iron condors, are all positive theta positions. At Simpler Trading, we especially love selling premium within the last 30 days to expiry, particularly within days of expiration, for the fastest return on our money. With clearly defined risk and distinct technical analysis, we can take advantage of one of the basic characteristics of an options contract.

2. Pinning Plays –

Who likes the big money players? Not us. We are retail traders, and we are here to teach other retail traders how the big money plays at this game. Options expiration brings a lot of manipulation by hedge funds and institutions, and we like to make money off their games. Our traders analyze past price action around expiration, high volume and open interest on specific strikes to identify where they believe stocks will pin at a certain number on expiration Friday. Combine this fact with positive theta positions, and we have a setup. Take the example in Home Depot (HD) below. John placed this iron fly earlier in the week, and its slow grind to profitability has added money in his pocket.

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3. Gamma Explosion –

In addition to premium selling, opportunity also lies in very short term, directional opportunities through gamma explosion trades. Here at ST, much of the time, we select our option strikes based on the delta – or how much the option’s value will move if the underlying most $1.00. Gamma is a derivative of delta that tells us how much the option’s actual delta will move. Buying options close to expiration means the extrinsic value has mostly decayed, and they are cheap to buy making them more affordable for quick trades. It also means that options can fluctuate in price much quicker with any changes to the underlying stock price and get a gamma explosion. With price moving through even a few strikes, the theta will rapidly increase, allowing you to sell at higher prices – exactly what you want when you’ve purchased an option.

4. Short-term, Low Risk Way to Get Involved –

One of the most intriguing aspects of this type of trading is the small amount of risk involved over a short period of time. The premium we sell is generally in the money, allowing us to collect ample credits. This allows us to get 1:1 or 2:1 risk to reward scenarios on these trades. As previously mentioned with the gamma explosion trades, the options prices are very low debits due to the proximity to expiration, and it’s understood that you’re risking the debit paid. You won’t find us risking a crazy amount of money, and waiting for weeks on end to earn our credits. These types of plays pay off within days, and when they don’t work – you’re risking about the same amount you’re attempting to make.

5. Avoid Getting Chopped Up – 

Trading is just as much about what to trade, as it’s about what to avoid. Due to the choppy, back and forth nature of options expiration week, trading the indexes, and often, other directional moves, is something we generally like to avoid during this time. Getting a read on this during expiration week is something our traders excel at, and can really help your bottom line. Even though we’ve had some wild swings the past few expiration cycles, at the end of the week we are pretty much where we started, and all is forgiven. Don’t get caught up in the chop!

Different Strokes for Different Folks – How Our Experts Do It

Bruce likes trading expiration with a combination of volatility, expected move and price movement factors. He typically puts on trades about 2-3 weeks in advance of monthly expiration, and this is the only time he likes to hold on and squeeze out every last bit of the trade. Depending on the specific situation, he will trade these setups using iron condors and butterflies.

Henry likes to focus on wide iron flys, short straddles and unbalanced butterflies, playing them specifically from Thursday into Friday to capitalize on the quick decay.

John generally starts with his monthly expiration plays the Tuesday of expiration week, working to identify spots with high volume and open interest to set up theta decaying iron flies at pinning strikes.