Expiration Friday Trades

Tomorrow is the last day of trading for April options. Often when there are many puts and calls near where the stock opens, the stock gets pinned to the strike. That’s not to say that the stock doesn’t break the pin and wander off. Anything can happen so one must watch all day.

This is what I’m looking at for tomorrow.

Pinning Candidates

It looks like the top two, Goldman Sachs and Apple, are prime candidates to be pinned at 120 tomorrow. Goldman announced earnings early this week, so there shouldn’t be a lot of news out tomorrow to move the stock. That is, unless Citibank’s earnings announcement tomoorw morning shakes up all the financial stocks.

Google

Google is all over the place in after hours trading after its earnings announcement.  Who knows if it will stabilize tomorrow morning near a strike.  The open interest is wide and deep for Google options.  So we will have to see at 10AM.  It might happen that Google will have momentum tomorrow so that a more directional bet would make sense.  If it is moving up, then one could buy a call just above where it opens and sell two or three calls at the next higher strike to pay for it and make the trade close to delta neutral.

Rest of the List 

Research in Motion (RIMM), First Solar (FSLR), and Mastercard (MA) are good candidates too.  The others on the list, Autozone (AZO), Baidu (BIDU), and Chicago Mercantile Exchange (CME) don’t have very many puts. So they aren’t very good candidates for pinning.

Monte Carlo Results

What is the probability of a successful trade? Which trade is the most likely to succeed? To answer these questions, I ran the Monte Carlo simulation for each straddle. The inputs are the stock price, the straddle price, the number of trading days left, the interest rate, and the historical volatility of the stock. The output is the probability that the stock wanders past the break even point on either side.

Some of these look better than others.   The best one is Google, only a one percent chance that it will wander outside the break even points.  Of course, this isn’t correct.  The volatility of the straddle will collapse tomorrow morning making the break even points closer together.  We will have to recalculate that one in the morning.

Notice how different GS and AAPL are.  Though they are at the same stock price as can be seen in the top table, and the at the money straddles are the same value, the trades are very different.  It is because Goldman Sachs has a much higher historical volatility.   

I believe that the probabilities are upper bounds, because of the extra pinning effect of the options on either sides of the strikes.  Still, I would sell more straddles of the stock that had the lower probability.