Expiry Day Option Buying Strategy

An expiry-day option buying strategy involves buying options contracts on the day they expire, aiming to profit from potential price movements of the underlying asset on that day itself. This approach is commonly used by short-term traders looking to make profits on brief price fluctuations. However, it requires a good understanding of options trading and a well-planned strategy to maximise potential gains while managing risks. Buying options on expiration day has its own set of risks and rewards that traders should carefully check before executing this strategy.r.

What is an Expiry Day Option Buying Strategy?

Expiry-day option buying includes acquiring options contracts to profit from price changes in the underlying asset on the options expiration day. Options have different expiration dates, and these techniques focus on options that expire on a specified day, sometimes known as the "expiry day." This is mainly employed by traders and speculators hoping to profit from short-term price swings.

The universe of options contracts is divided into two basic types: call options and put options. Call options offer the holder the right to purchase the underlying asset at a predetermined price (strike price) before or on the expiration date. Put options grant the holder the right to sell the underlying asset at a predefined strike price before or on the expiry date.

Trade like a pro in NSE F&O with Zero Brokerage*

Start Trading

* By signing up you agree to our Terms and Conditions

Working of an Expiry Day Option Buying Strategy 

Assume Company XYZ's stock will suffer a substantial price increase on its expiry day, which is only a few days away. So, you:

1. Begin by selecting the relevant call option. When employing an expiry-day option buying strategy, it's crucial to evaluate the strike price relative to the underlying asset's current price, the option premium (cost of the contract), and the limited time remaining until expiration.
2. After you've decided on a call option, buy it. This entitles you to purchase Company ABC's stock at the strike price on or before the expiration date.
3. As the expiry date approaches, monitor the stock's price closely. If the stock price increases and exceeds the strike price of your call option, your option will become lucrative.
4. If the stock price goes up on the expiration day, you can use your call option to buy the company's shares at the strike price, which may be lower than the market price. Alternatively, if the option contract has increased in value, you can sell it.

If the stock price does not move as expected, the possible loss is limited to the option premium paid. If the option is still out of the money, you can choose not to exercise it.

Advantages of Expiry Day Option Buying Strategy

While buying options on expiration day can be a risky strategy, it also presents some potential benefits for traders looking to capitalise on short-term price movements. 

• Leverage: Options give leverage, allowing you to manage a more significant stake in the underlying asset for a fraction of the cost. This can boost your prospective profits.
• Limited Risk: The biggest risk in this technique is the premium you pay for the option, which provides some downside protection.
• Capturing Short-Term Volatility: An expiry day option buying strategy allows traders to potentially benefit from increased volatility and price fluctuations in the underlying asset, particularly around events such as earnings releases or other market-moving news.
• Flexibility: You may tailor your risk-reward profile by picking alternative strike prices and expiration dates to meet your trading objectives.

Risks Associated with Expiry Day Option Buying Strategy

Here are some common risks associated with expiry day option buying strategy:

• Time decay: Time decay, also known as theta decay, causes the value of options to decrease as they approach their expiration date.
• Volatility: Expiry Day option trading strategies may be quite turbulent. Sudden market swings can result in substantial profits or losses, making it critical to have a well-thought-out strategy and risk management plan.
• Stock price changes: Effectively predicting short-term price swings can be difficult. Your option may be worthless if the stock price does not reach the strike price before expiration.
• High transaction costs: Frequent trading in options can result in high transaction costs, such as fees and bid-ask spreads, which can cut your earnings.

Expiry Day Options Strategy: Mistakes to Avoid

The following are some common mistakes that one should avoid with an expiry day option strategy:

1. Buying options too late: If one is waiting until the last minute to purchase options, it may reduce potential profits due to time decay.
2. Trying to time the market: Attempting to time the purchase of options based on market trends or predictions is complex and can lead to costly mistakes.
3. Lack of research: If one does not thoroughly research the risks and rewards of this strategy, one can make uninformed and costly decisions.
4. Poor diversification: Spreading investments across different options and underlying assets is crucial for managing risk rather than putting all resources into one option.
5. Ignoring volatility: Options prices are influenced by market volatility, especially on expiry days. Overlooking volatility levels can result in buying overpriced options or missing profitable opportunities.
6. Lack of monitoring: One should regularly monitor investments, and staying informed about market conditions will help to make necessary adjustments.

No investment plan: Making decisions without a well-thought-out plan can lead to emotional choices, which often result in poor results.

Conclusion
Expiry-day option buying strategies give exciting prospects, but must be considered part of a complete trading or investing strategy. Important principles such as diversification and adequate risk management must be followed to create a well-rounded and sustainable portfolio. Always obtain expert counsel before engaging in options trading, especially if you are new to derivatives and financial markets and remember that choosing a reliable stock market app is important. Happy Trading!