Another Expiration
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home | Options Trading Archive | Another Expiration

Another Expiration

Henry Gambell
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Wednesday brings us just two days away from August OEX, or Options Expiration Day for those that may be new to trading the options market.  The volatile and sometimes surprising week leading up to OEX, the third Friday of every month, is not for the faint of heart. This is the week professional traders will work towards “pinning” stock prices. Pinning can be defined as striving to move a stock to a certain strike price so the bulk of the open options, options they sold earlier in week, expire worthless. This is a great strategy and there are many options traders that will only trade this week, and do so quite profitably I might add. Two things to look for during this week are, first, if you're strictly buying calls or puts for a directional play, go out to the next expiration month. That way you will be outside the reach of this week's shenanigans. Second, look for stocks that have a history of being pinned and find strategies to take advantage of that.

One stock I like to watch for a pin is Mastercard. Looking back at previous expiration months we see April's close at 259.50 and July's close at 197.22.  In a perfect world the stock will close right at a key strike price -- but even the act of moving towards the strike with the largest open interest creates great trading opportunities.  Both of these close prices would've been great for a ratio spread, selling three out of the money options for each in the money option that I buy. So with today's current pricing, I'll be looking to pin MA at 210, but won't initiate a play until 10 minutes before the close on Thursday or right at the open on Friday.  Assuming MA is above the pin price (let's use $213.00 as an example) I would buy the $220 puts, and for each $220 put I bought, I would sell 3 of the $210 calls.  In a perfect world, MA would close Friday at $210.00, and I would therefore make a few points on the puts I bought, and the puts I sold would expire worthless.  The "perfect world scenario" doesn't have to happen for this trade to work out -- that's just the ideal goal.  As this is a day trade, it can be managed during the day with stop losses as any normal trade.

Keep in mind, a strong rally or selloff in the S&P 500 can change the strike price we're looking to pin at, so we'll wait for Thrusday or Friday to get prices on this ratio spread.

Trade described: None, waiting for Thursday or Friday to enter prices

Positions at time of publication: No position in MA

Symbol VIX
Action (Buy to open/Buy to close/Sell to open/Sell to Close) Buy to Open
No. of contracts (where applicable)  
Expiration month September 2010
Strike price 26
Type (Stock/Call/Put) Long Calls
Trade price 5.70
Spread (better than/none) xxxxxxxxxxxxxxxx
Position? Bidding For
Chart Source? Trade Station


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