How to Directionally Trade Options at Expiration

• stevenplace
• August 26th, 2009

Opex week is one of my favorite weeks of the month. This is the week that decides whether all the gamma I sold will come back to pay dividends (it did), and you also have the advantage to really get some leveraged exposure on the short term with front month options.

Don’t get me wrong, this is risky, but your overall risk is capped by the total cost of the option. Compared to the (theoretically) unlimited risk of buying stock, it does have it’s advantages.

One of the main disadvantages is that you have only one week to trade them, and if you are trading out of the money options, the entire cost of the option is extrinsic, which means you will lose all your money by opex unless you get a fast move. That is why I suggest buying in the money options if you are going to trade around options expiration, at least one strike in.

My subscribers had a great trade setup in this with TGT. You can see the original trade here.

This trade shows the benefits of trading leveraged– the contracts we bought cost 1.60 for exposure to 100 shares of stock (delta). If you wanted to buy 100 shares of TGT that day, you would have needed $4,450 in capital. By using the contracts, you effectively are leveraged 27x. As long as you keep tight stops, this is a way to gain a lot of short term exposure without dipping into your capital base too far.

And since this was a short term trade, I updated the risk management parameters (stops) live on the twitter stream, so my subscribers knew exactly when to take profits.

Depending on the individual entry and exit, we ended up with a gain of 30-40% on the trade. Not bad for a couple hours!

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.

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