My Dummy Options Expiration Trade

• stevenplace
• February 18th, 2009

One of my favorite times of the month is options expiration week. That means front month time decay is always going to be much larger than any other time.

So I was going through some screens and I stumbled onto AEM. They’re a gold miner, and they’ve had a pretty decent chart and some great relative strength in this market. So let’s say I’m moderately bullish on them.

Anyways, here’s the trade:

Buy AEM Feb/Mar 55 Cal Calendar spread 2.50 or better

It’s going to be a little harder to get this fill but I’ll try for it. This is a great play because the February options (front month) have a much higher volatility than the March. The February calls are trading for 1.40, which is all extrinsic — that means if the stock stays below 55 all of that money will go away: that’s 140 dollars you can caputure through friday!

Here’s the risk profile:

You can see that your breakeven is between 52 and 59. Also, the delta right now is slightly positive, so it’s a bullish play provided the stock doesn’t go above 55. The statistical success is around 63%, but I think the odds of success are much higher in this play. Why? The 55 strike calls have the highest amount of open interest– about 11,500, which is equivalent to 1.15 M shares: that’s 18% of yesterday’s volume!

I think that we could see a good chance of a pin at 55, which means that the max gain is possible, which is about $150 per trade– that’s 60% on your capital, not bad for a 3 day hold.

EDIT: Just found out (thanks @daytradinggenie) that front month volatility is so high because they report earnings tonight. So the play is much more riskier due to event driven noise (explains the vol), but I still like the play in general. Selling straddles before earnings has worked very well this quarter so I think that this is still a good trade.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

Tickers: aem

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