‘Expiry’ in the stock market refers to a contract running into its expiration date. This is a term that’s usually used in derivatives trading. In the Indian stock market, derivatives are mostly of two types – futures & options.
The expiry day trading strategy is usually used in NIFTY options trading – also known as index options trading. While this strategy, if implemented correctly, could give massive returns, it comes with a lot of risks as well. Wer’e going to cover both the advantages and risks of expiry day option trading in this article.
What is the expiry day trading strategy?
All options have an expiry date – the date after which they can’t be traded on the market anymore. Expiry day trading refers to trading strategies that are executed on this expiry date of your contract.
On this day, traders have two options – either exercise their options or let them expire worthless at the end of the day. Expiry days usually fall on the last Thursday of the month for monthly options contracts.
Like we said earlier, this is an extremely high-risk, high-reward strategy of trading. While the buyer of the options contract can very well exit the contract before the expiry date, the strategy works only when they decide to stay invested till the last day.
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Understanding the strategy
Here’s a breakdown of everything you need to know on expiry day:
- In The Money (ITM) – This goes in two scenarios: either you have a put option to sell above the current market price, or a call option to buy below the current market price.
In both these cases, you’re in the money and your contract has ‘intrinsic’ value, which is to say that it’s profitable for you to either exercise the option or to sell it. In either case, you make money.
- Out of the Money (OTM) – If you’re on the opposite end, however (meaning you have a put option below the market price or a call option above) it’s usually not profitable to exercise your option. Traders usually let these options expire worthless.
What to do on expiry day
Expiry day trading basically entails making the decision whether to sell, buy, or exercise the option you have on expiry day. These decisions are made based on market conditions and your risk appetite:
- The short straddle – In straddle strategy, traders sell both a call and a put option with the same strike price and expiry date. This way, they profit from the lack of movement in the asset. The options expire without exercise and the selling premiums become profit.
- Short strangle – Here, the trader sells both a call and put option with the same expiration dates but with different strike prices. Here too, the trader profits from the stability of the underlying asset.
- The iron condor – This is a bit more complicated. In the iron condor strategy, the trader sells both call and put options with the same expiry date but at different strike prices.
Like above, the trader gets to keep the options premium if price remains relatively stable. However, the trader also buys OTM call and put options as hedges. This way, of the price remains relatively stable, the trader profits from the premiums.
However, if prices become volatile and cross the sell strike price, the hedge call and put options work to minimise losses.
Also read: What is the strangle option strategy?
Things to keep in mind
Now that you know how expiry day trading works, here are some things you should keep in mind to make sure you don’t make any mistakes.
- Double check the expiration date – This will help you avoid any unexpected surprises.
- Monitor the market carefully – Keep an eye on the news and events that could possibly affect prices on your expiry day.
- Technical analysis is your friend – Identify major support and resistance levels, as well as potential trends that could affect the price’s movement during periods of high/low liquidity.
- Manage risk – Just like with any other trading strategy, make sure you’re using proper risk management to trade. Use stop-loss orders to mark how much money you can afford losing on a single trade and stick to them.
- Close positions – Most traders aim to close their positions before expiry if they’re already profitable. You can, too, lock in gains and reduce the amount of risk you’re taking on the contract.
Expiry day trading, in conclusion, is trading option contracts on the date of their expiry. There are two options there – either exercise the option or let it expire worthless.
However, this trading strategy is risky because the contracts have little to no theta (time value), meaning if something were to go wrong at the last minute, your stop-loss is the only hope.
We encourage you to do your own research and paper trade before you trade your options with this strategy. Until then, good luck!
I am passionate about stock investing and have a knack for simplifying complex market concepts. Providing readers with valuable insights and empowering them to make informed investment decisions is my jam.