Ken Trester

The Thrill of Expiring Options

by Ken Trester   03/15/09

If you are looking for really big, really fast options profits -- and, really, who amongst us isn't? -- then consider buying expiring options.

"But, Ken, aren't expiring options the most risky?" Well, I'm glad you asked.

In some cases the answer is yes, but that risk is due largely to the fact that during the last week before expiration, very close-to-the-money options can make dramatic moves in value very quickly -- often within one or two days.

The reward, however, is that buying these kinds of options can generate some of the biggest home runs you'll ever get. And, unlike earnings season, which only happens quarterly, expiration cycles take place monthly, so you get a dozen chances a year to take advantage of these last-minute profit opportunities!

The best options to buy in what I call "expiration plays" are index options, such as options on the S&P 100 Index (OEX). The key to success in this strategy is to buy on weakness in the option price. You should also try to buy options under $1 whose underlying instruments are trading very close to the strike price.

But be forewarned; you can incur a fair number of losses with this strategy, but just one big move in the index price can give you the jackpot of a lifetime. You might try testing these trades on paper for a while to see the results of this type of play.

In expiration plays, you are betting on surprise volatility swinging the price of a stock or index -- and, thus, the option -- into your favor. And with the current level of volatility, our ability to take advantage of price swings is greater than when the market is trading flat or even when it is climbing predictably.

Turn $12.50 Into $100 in Just One Day!

Although I favor index options for expiration plays, that doesn't preclude the power of equity options as a terrific resource. Recently, I was watching shares of IBM Corp. (IBM) move in a three-point trading range each day as expiration Friday approached.