Stan Freifeld

Make Great Expiration Day Trades

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Finding Solid Expiration Day Plays

Here's the strategy in general terms. (I give out more specific instructions to my mentoring students, but you can form your own rules as well with a small amount of research.)

On the morning of expiration, look for strikes that have the put and call open interest within about 10% to 20% of each other, and large relative to other strikes.

Of these, determine whether the stock is within about 2% of the strike. So if you're looking at a $40 strike, you would want the stock to be trading in a range of about $39.20 to $40.80.

If these conditions are met, this stock might be a potential expiration-day play.

'Straddling' The Strike

Let's assume that XYZ is $40.50 and there is huge open interest at the $40 strike. What you do now is buy the $40 straddle (i.e., a long straddle would mean buying both a $40 call and a $40 put, with a shared strike price and expiration date), which will be trading for a relatively small amount, say 70 cents.

Now let's think about one of the Greeks; namely delta. (Learn more about "bridging the delta" in 4 Factors in Play When Making Options Trades.)

Since the call is in the money, the position will have positive deltas. So you need to short enough stock to make the position delta-neutral.

Alternatively, you could have ratioed the straddle by buying more puts than calls so that the initial position is neutral.

In practice, I have found that buying the regular straddle and shorting the stock works best.

Now as the stock comes down in price, the calls will lose deltas and the puts will gain deltas, making the position short deltas and requiring you to buy stock. So, as the stock moves down, you will be required to buy and as the stock moves up you will sell. Just what you want, buy low and sell high!

There is an important question and some potential issues with this strategy. The question is, when do you make the adjustments, i.e., how much does the stock need to move before adjusting the deltas? There's no precise answer as far as I know, but the strategy should work out if you use something like 50%-100% of the cost of the straddle, or 35 cents to 70 cents in this case.

For this strategy to be profitable, you must make enough money on the adjustments to cover the original cost of the straddle. The problem is that other factors can force the stock to move away from the chosen strike price.

If this happens when you first put on the position, the trade may turn out to be a loser. Also, if you decide to do this trade, keep in mind that it either must be constantly monitored or, if you have a sophisticated trading platform, you can set it up to work almost automatically.

If you decide to go for it, I'll be there in spirit with you. Good luck with your expiration-day trading.

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