As a market maker on the Chicago Board Options Exchange NASDAQ: CBOE , I looked forward to Expiration Friday. It was always the most exciting time of every month. When the bell rang on Expiration Friday to end the day — that was it for those options. That was when we knew for sure whether we made or lost money on the trades. But professional traders still treat expiration as a special day. Options trading investors that use options occasionally can benefit from learning how the professional approaches Expiration Day.

Options expiration is exciting for a number of reasons. For one, it is usually the most active trading day of the month. Also, trading is usually faster, more final, and there is more risk and more reward, and synthetics come more into play. Find more option analysis and trading ideas at Trading Strategies.

How to Trade Options Close to Expiration - unyyozeqy.web.fc2.com

With a typical option, a trader may have it on for a week, a month, maybe longer. By the end of the day, they are guaranteed to be either a locked-in winner or a locked-in loser. There is some excitement in that. Long options decay so fast on Expiration Day that traders are anxious to get out of their negative theta risk.

Theta is a measure of the rate of decline in the value of an option due to the passage of time.

If they have any long options, they try and close them all to avoid this risk. If traders have short options left in their inventory, they represent high the highest gamma risk, especially when one considers the potential rewards.

Gamma is the measure of the acceleration of the change in delta. Short options can go from being out-of-the-money winners to being in-the-money losers in a heartbeat on Expiration Day. Remember, short options have limited reward and unlimited risk.

If a trader has a short option on expiration day that is worth 10 cents, the most profit he can continue to squeeze out is that final 10 cents. But if the market moves against him, he can lose huge: Thus, on Expiration Day traders strive to close out their short option positions too.

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Traders, especially market makers, can exploit in a different way the fact that there is usually greater trading on Expiration Day. This can make it easier to trade synthetics — the relationships between options that stem from put-call parity. Put-call parity essentially states that a put can be converted into a position that functions exactly like a call simply by adding stock; and likewise a call can be converted to a position functioning exactly like a put by adding stock.

Put-call parity ensures that prices in the put-call pair at each strike price are kept in line. When a call gets cheap or expensive relative to the price of the put, an arbitrage scenario exists, and that offers up a profit opportunity.

Arbitrageurs — like market makers — trade in and out of synthetics, locking in small profits with each trade, on Expiration Day. I still look forward to Expiration Day. I may be removed from the trading pits but I understand how market makers treat Expiration Day.

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And that makes me a better trader. Article printed from InvestorPlace Media, http: Financial Market Data powered by FinancialContent Services, Inc. Nasdaq quotes delayed at least 15 minutes, all others at least 20 minutes. Breaking news sponsored by googletag. How Option Pros View Expiration The inside story on expiration day trading Mar 11, , More on InvestorPlace 7 Monthly Dividend Stocks to Pay Your Bills Regularly Twitter Is Soaring.

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