Trading Options at Expiration

In volatile times it is best to limit exposure. Hit and run in the markets. One way to do that is to keep your stock account in cash and only trade special situations like earnings announcements, FDA announcements, and options expiration. the beauty of trading options expiration is that it occurs every third Friday of the month. There are extra quarterly expirations for certain options discussed briefly in a post earlier this week.

Jeff Augen describes the dynamics of options expiration in his new book Trading Options at Expiration: Strategies and Models for Winning the Endgame.   It is 140 pages describing the dynamics of the last few days in the life of equity options. The three forces that drive the dying days of options are time decay, the collapse of implied volatility, and pinning of the stock price to strikes.

Time Decay

The weekend before the Friday that options expire is 36% of the time to expiration. That leads to strategies for taking advantage of that time decay. Thursday night before Friday expiration is another 17 hour period of time decay that traders take advantage of.

Pinning

I have written about pinning of stocks to strike prices before. In this book Augen uses tick data to show how selected stocks behave and migrate from strike to strike, if they are not pinned at one strike.

Volatility Collapse

There is an interplay between time decay and volatility collapse that Augen discusses. On the last day, as the ringing of the closing bell approaches, implied volatility of the options collapses.

Trades

Throughout the book, Augen uses examples of trades to describe what he believes are good trade structures and poor trade structures. He looks tick by tick at how the trade progresses through the day.

Go to Amazon and read other comments on Trading Options at Expiration: Strategies and Models for Winning the Endgame. I found it very interesting.