Dangers, opportunities & trades of expiry day trading: Shubham Agarwal!

Expiry day trading, or more famously known as 0DTE trading, is very popular since the launch of weekly expiries. Many indices have now stopped issuing options in weekly expiries, so one would expect the interest to reduce. However, it has not.

In fact, in the markets where there are expiries held daily, the option volume on expiry day trading constitutes 60%-70%. There is easy money sensed here that attracts a lot of traders. With options, you can do two things: either buy or sell. We will see how expiry day makes both these activities more attractive and dangerous. We will understand the ways to prevent those dangers and yet trade in the attractive market.

Option Buying:

Expiry day is the last day, so ideally, we do not have much time to be in the trade. So, time is always running out. Remember the time value that we all talk about. The premium drop that happens due to the passage of time is also known as time value decay. This is the reason for the biggest danger.

Danger: If we buy an option and the stock or index moves in our desired direction but fails to inch closer to the strike price of our option at the close, we may lose all the money invested.

Opportunity: Opportunity here is, while the option premium keeps dropping during the day, the move of crossing over of the strike price by the stock/index’s price puts fire in the option premium while the crossover happens. As a result, we end up seeing the blast in premium, famously known as the “Zero-Hero” Option.

Trade: Try to seek a trade in a stock with a target during the day up to the next higher strike call (Bullish) or next lower strike Put (Bearish). Strictly theoretically, that option’s premium could double or even more if the target is achieved during the day. If not, you lose all the money. That is still 1:1 risk versus reward.

Option Selling:

Now that the roles are reversed the dangers in Option buying becomes opportunities in option selling. The opportunity becomes danger.

Danger: Expiry days are notoriously known for mega movements. Hence, an option seller will be losing his shirt if just one such day appears after many profitable expiries. That day could create losses bigger than profits from 10s of expiries of option selling.

Opportunity: We are still on the fastest time decay possible. All Higher Strike Call Options and Lower strike Put Options are going to lose premium. If the stock stays same level for even 2 hours, you make money.

Trade: The losses are scary when they are unknown. The moment you have knowledge of the maximum amount of loss that we are going to make, you are prepared. No surprise loss reduces the majority of danger.

So, the trade is to make the Option selling losses limited and known. This can be done by buying a cheaper (higher call/lower put) option against the option sold. Since we are taking a trade in limited loss strategy, now we can also sell option that is closer to the current market price for more premium.