January series expiry week: Top 4 caveats for trading day after expiry day

A lot is discussed on what and how to trade in the last few days and especially on the day of expiry but seldom anyone talks about trading in the first few sessions of expiry.

While the fat premiums could be one of the put-offs, but, other than that, we tend to treat it as any normal period and end up making losses attributed to less understood elements of options.

As a monthly event for all the underlying stocks as of now, ‘Expiry’ changes a lot of equations and is capable of a momentary upsetting a well-established order. We will raise caveats for possible distortions in the aftermath of an expiry day.

During the last hour of expiry, the dilemma is to either unwind the positions or carry it forward. While carry forward may not have so much of impact on the underlying, unwinding may create a lot of noise that the underlying does not deserve.

Governed by such volatility when the expiry ends, we shall be watchful of certain more common pitfalls.

We will go through 4 such caveats learned out of empirical evidence from the F&O market:

#1 Avoid Leverage in last hour of expiry

The unwinding pressure that we talked about is much more impactful on prices in the last hour of trade on the day of expiry. Hence, the prices may be unduly pressurized or inflated and the same would normalize in the very next session.

Avoid taking any leverage in the last hour of trade. If at all any such anomaly looks intriguing resort to options and move to a leveraged trade in futures only after any possible dust settles.

# 2 Huge Additions & Big Price Action pockets

More often than not, we do get lured by the ongoing winners with a hope to see it continue.However, I have been bitten by a few of these well - known winners.

What ends up happening is that the price at which we would get in might just mark an intermediate turning point against us.

Since then as a rule, I practice and recommend to stay away from the stocks and sectors which have had a large addition in Open Interest(OI) expiry over expiry and have already seen a big move.

Either avoid completely or wait for further additions and or a pullback to enter.Not a good set for early expiry trade.

#3 Trading Unwinding

Unwinding, especially, Short Unwinding has a relatively higher and swifter impact on the prices and might push us to believe that a reversal is in place. This could be visible more in the last week or even the last day of expiry.

The same move could actually just be led by unwinding pressure and could very well turn into business as usual on the very next day of expiry.

Stay away from the stocks that have been taking an opposite course of price action in the last week of expiry. Awaiting fresh addition in favor of that reversal has always cost me a few percentages but has saved me off of many big disasters.

# 4 Avoid Selling Options in Ratios

Although, we have talked about how non - linear time value element makes it unattractive to create a trade with one long Option and multiple Short options(no matter how far) against it.

It is crucial to reaffirm here that certain stocks may actually be in expiry led disruption.In such a situation, the very next sessions of expiry may bring in a Swift Price action, ruining the directional forecast by turning the trade into losses arising out of additional options short, despite the view being right.

Finally, the objective here is not to discourage from taking a trade but to know that there is a possible pitfall and be vigilant.

(The author is CEO & Head of Research at Quantsapp Private Limited.)

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