Options trading involves buying and selling financial contracts called options. Options are derivative instruments, meaning their value is derived from the value of an underlying asset, such as stocks, indices, commodities, or currencies. There are two main types of options: call options(CE) and put options(PE).
Call Options:
A call option gives the holder the right, but not the obligation, to buy the underlying asset at a specified price (strike price) before or at the expiration date.
Traders buy call options if they anticipate the price of the underlying asset to rise or it’s called Bullish.
Put Options:
A put option gives the trader the right, but not the obligation, to sell the underlying asset at a specified price (strike price) before or at the expiration date.
Traders buy put options if they anticipate the price of the underlying asset to fall or it’s called Bearish.
Options trading on expiry day can be particularly challenging and risky, as the time decay (theta) accelerates, and option prices can be highly volatile. Traders often employ various strategies to capitalize on the price movements and take advantage of the unique characteristics of the expiry day. Most of the traders do option trading on indices named Nifty and Bank Nifty. There are a few option trading strategies for expiry day option traders should follow:
Straddle or Strangle:
Straddle: Buy a call and a put option with the same strike price. This strategy profits from significant price movements, regardless of the direction.
Strangle: Similar to the straddle, but the call and put have different strike prices. This strategy is effective if you expect a large price movement but are uncertain about the direction, some times movements will be directional so need to be more careful.
Iron Condor:
Sell an out-of-the-money (OTM) call and an OTM put, while simultaneously buying a further OTM call and put to limit risk. This strategy profits from low volatility and is suitable when you expect the underlying asset to trade within a range.
Butterfly Spread:
Involves buying one lower strike option, selling two middle strike options, and buying one higher strike option. This strategy is effective when you expect low volatility and a specific price level at expiry.
Calendar Spread:
Involves buying and selling options with the same strike but different expiration dates. This strategy profits from changes in volatility and is suitable when you expect a moderate price movement.
Naked Options:
Selling options without owning the underlying asset. This strategy involves higher risk but can be profitable if the options expire worthless.
Gamma Scalping:
Involves adjusting positions to maintain a neutral gamma exposure, taking advantage of changes in option prices due to underlying price movements.
Pin Risk Strategy:
Monitor option positions that are close to the strike price of the underlying asset. Adjust positions to minimize losses if the underlying asset closes near the strike price.
Dividend Capture:
If a stock pays dividends, you may employ a strategy to capture the dividend by owning or selling options before the ex-dividend date.
Trading options on expiry day requires careful consideration, experience, knowledge and monitoring, as prices can be highly unpredictable on this day, and a close watch is required during the time of trading session. It’s essential to have a solid understanding of the risks involved and to use risk management strategies, such as setting stop-loss orders and the right time exit to protect your capital because sometimes movement will be directional and sweep away all your capital. Additionally, it’s advisable to practice these strategies in a simulated environment or with a small position size before implementing them in a live trading scenario. Expiry day trading is very risky without appropriate knowledge and experience, Hence advisable for experienced traders only.
