This is not a "strategy" per se. remember that all I'm trying to explain
here is what causes pinning behavior (and I probably should have changed the
subject header once again). In no way am I trying to recommend a way to
trade on expiration.
What I'm describing is what happens as a "natural" consequence of open
interest at a strike near expiration. If you are long or short that atm
strike from a PREVIOUS position, you will obviously have a keen interest in
what happens during the trading day on expiration Friday and thus be looking
for ways to trade your position to profitability. the long trader is
fighting decay while the short trader is hoping that the last drops of theta
- which are often significant - evaporate. The long trader will be looking
to scalp the remaining gamma while - ironically, I guess - the short trader
is the one feeling the "max pain" as the underlying moves AWAY from the
strike.
Any attempt to ENTER a position like this on expiration Friday requires a
real gambler's spirit along with the finesse (and favorable margin) needed
to play it skillfully. Entering a box or partial box on expiration will
surely be a highly expensive proposition for a retail trader. The bid/ask
spreads will be unforgiving and any chance you have of scalping a profit
will require that you have unbelievable timing and ability to pick
direction. and if you have such market ESP you may as well just play it with
the underlying since that would be much easier and cheaper to trade.
A couple other comments below...
-----Original Message-----
From: OptionClub@yahoogro
Behalf Of comedynight2000
Sent: Monday, November 30, 2009 2:57 AM
To: OptionClub@yahoogro
Subject: [TheOptionClub.
Dear Michael: thanks for this interesting post which contains an idea for
expiration trading that I had not considered before. Please allow me to
restate and expand.
On expiration Friday, you appear to be saying that it makes sense to put on
two legs of a conversion or reversal and either lock in the third leg at a
profit after a favorable or, at worst, hold through the end of the day and
exercise before 4pm Saturday. For example, you can buy the stock, and buy
the puts. (Especially helpful if you have a slight upside directional bias.)
If the stock declines, exercise the puts. However if the stock moves up
later in the day, thenn you may be able to sell the calls for a risk free
profit, having locked in the conversion. Is that basically right?
mc- no. what you're basically saying is just to buy calls and hope the
market goes up. again, this is pure short term speculation that if you are
good enough to predict accurately, I salute you.
If so, why not do this as a box since margin requirements would be so much
less? For example, start the position as a three legged box. With the
stock close to 580, say, buy the 570 580 vertical call debit spread plus the
600 put (to protect downside risk). If the stock goes lower, sell the 580
put to lock in the box at a profit. If the stock goes higher, sell the long
call at a profit and short the stock to lock in a reversal (although it's
not clear if this would be at prices better than the market originally
offered.
Mc -the bid/ask spreads on all these trades would probably wipe out any
chance of significant profit unless the underlying somehow sold off
enormously. The trade you are suggesting requires the 580 strike to have a
lot of premium left in it.
Perhaps a third trading strategy would be to buy at DITM gut strangle early
on Friday morning. Then you can sell the short ATM straddle legs against
the long DITM legs as the stock oscillates. Thanks very much, in advance,
for your comments....
Mc - like your previous example you would be generating a lot of premium for
the market makers. And you would likely be making the wrong trades in the
sequence. The premium is going to be the greatest on the straddle at or near
the open so if you are going to sell it, that's the time. That strangle is
meaningless except as disaster protection in the event that somehow during
the trading day the underlying flies outside the bounds of the strangle. In
effect you've described three incompatible trades or three trades that
benefit from dramatically different scenarios: 1) buy atm calls and hope the
stock goes higher to offset the premium paid for those calls (this is a
bullish bet on direction and or volatility), 2) buy an otm put and hope for
a big sell off (this is a bearish bet on an extreme directional move to the
downside), and 3) a short atm straddle (which is of course a bet on
volatility completely dying and the hope for an atm).
--- In OptionClub@yahoogro
>
> Comments below.
>
>
>
>
>
> From: OptionClub@yahoogro
> Behalf Of Jack
> Sent: Sunday, November 29, 2009 2:45 PM
> To: OptionClub@yahoogro
> Subject: RE: [TheOptionClub.
>
>
>
>
>
>
>
>
> OK, so you're long 100 calls and the underlying trades up to 80.25. Your
> calls will be worth .25+. Why not sell the calls instead of selling the
> stock?
>
>
>
> Mc -Because you get the same quarter lock PLUS 100 free puts by shorting
the
> stock against the calls. (for those that can't see this , a long call plus
> short stock is synthetically a long put. In the example if the stock
> continued higher the long call would gain in value equal to the loss in
> value of the short stock and at expiration the exercise of the long calls
> would negate the short stock. Conversely that long call plus short stock
> means that below 80 the calls are worthless but the short stock gains
value
> as the stock goes south. Thus, the synthetic equivalent of the long put.)
>
>
>
> If the stock drops to 79.75 and your calls expire worthless, you are short
> 10,000 shares. What if it gaps up Monday (pin risk - cost me $4,000 one
> expiration L )
>
>
>
> mc- you buy the stock back at 79.75 and lock in another quarter. If you
> don't buy it back for some reckless reason (why would you not buy back the
> short stock you sold for no risk at 80.25 with the stock now trading at
> 79.75?), you just exercise the long calls. There is absolutely no reason
to
> be exposed to pin risk unless you are stubborn enough not to buy back
shorts
> at expiration - or sell longs if you don't want to be exercised.
>
>
>
> OK, so it drops to 79.75 and you buy shares - where's your protection?
What
> if it continues to drop, 79.50, 79.25,..
>
>
>
> mc- you don't need protection since you've just closed all your risk: sold
> 10,000 at 80.25 and bought 10,000 at 79.75. (i.e. you've just locked in
> $5000).
>
>
>
> I can understand why stocks would close at the strike with the most
options
> - when they had automatic exercise if .25 ITM. What effect has the penny
> exercise rule had?
>
>
>
> mc- this is irrelevant. It's not the automatic exercise AFTER expiration
> that drives pin behavior. It's deltas PRIOR to expiration that
professionals
> (and smart amateurs) are capitalizing on.
>
>
>
> From: OptionClub@yahoogro
> Behalf Of mcatolico
> Sent: Saturday, November 28, 2009 9:09 PM
> To: OptionClub@yahoogro
> Subject: RE: [TheOptionClub.
>
>
>
> For instance if I am long 100 80 strike calls on abcde stock and the
> underlying trades up to 80.25 with less than an hour or two to expiration,
I
> will sell 10000 shares against those calls to lock in the quarter premium.
I
> now synthetically own 100 long 80 puts. If my selling action (and if there
> are a lot of other open contracts at the 80 strike, the selling of many
> others) drives that stock back down to 79.75, guess what, I now buy 10000
> shares to scalp another quarter out of the market. Lather, rinse repeat,
as
> the pendulum wobbles back and forth and the scalps get tighter and tighter
> to the point where I'm scalping 10000 shares for a nickel or ultimately a
> penny.
>
------------
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