Expiry Day Trading: Opportunities, Dangers & Strategies with Shubham Agarwal

The Popularity and Risks of Expiry Day Trading

Expiry day trading, also known as 0DTE (Zero Days to Expiry) trading, has gained significant traction since the introduction of weekly expiries. Despite the expectation that daily expiries might decrease the interest in these trades, they have actually become more popular, especially in markets where expiries are held daily. On expiry day, the volume of options trading can make up 60%-70% of the total volume. Many traders are drawn to expiry day trading by the potential for quick profits, but it comes with its own set of risks and opportunities, particularly due to the concept of time value decay and the possibility of sudden price movements.

Highlights

• Expiry day trading remains highly popular despite expectations of reduced interest.

• 60%-70% of total option volume on expiry day, with easy money attracting traders.

• Key risks stem from time value decay and large price movements.

Option Buying: The Risks and Rewards

When engaging in option buying on expiry day, traders face the risk of time value decay, which accelerates as the expiration hour approaches. The primary danger here is that if the stock or index moves in the desired direction but does not reach the strike price by the end of the day, the trader risks losing the entire premium paid.

Danger:
If the stock/index moves in the desired direction but does not reach the strike price at expiration, the option premium decreases significantly, resulting in a total loss of the investment.

Opportunity:
The main opportunity lies in the sharp increase in premium that can occur if the stock/index crosses the strike price. This sudden surge in value is known as the “Zero-Hero” option, where the premium can double or more if the target is achieved.

Trade Strategy:
A prudent strategy involves seeking trades in stocks with targets near the next higher strike call (for bullish trades) or next lower strike put (for bearish trades). Theoretically, if the target is achieved, the option’s premium could increase substantially. However, if the target is missed, the loss is total, giving a 1:1 risk vs. reward scenario.

Highlights

• Time value decay accelerates as expiry day progresses, posing significant risks for option buyers.

• Zero-Hero options can lead to massive premiums if the target is met during the day.

• The ideal trade involves targeting the next strike price with an understanding of potential total loss.

Option Selling: Opportunities and Dangers

On expiry day, the roles of danger and opportunity reverse for option sellers. While buying options carries risks due to time decay, selling options can be profitable due to this same time decay. However, expiry days are notorious for mega movements that can result in significant losses for option sellers if the market makes unexpected moves.

Danger:
Expiry days are prone to wild, unpredictable price movements that can lead to catastrophic losses for option sellers. A sudden market swing can generate losses that dwarf the profits accumulated from previous successful expiry days.

Opportunity:
Despite the risk, the fastest time decay occurs on expiry day, meaning that out-of-the-money options (higher strike calls or lower strike puts) lose their premium quickly. If the stock remains relatively stable for even a few hours, option sellers can benefit from time decay without significant movement in the underlying asset.

Trade Strategy:
To mitigate the potential for large, unforeseen losses, limited loss strategies should be employed. By purchasing a cheaper option (higher call/lower put) against the sold option, the seller can cap their potential loss while still taking advantage of time decay. This strategy ensures that the trader is prepared for the worst-case scenario, with losses being known and limited.

Highlights

• Expiry day can bring mega movements that lead to substantial losses for option sellers.

• The fastest time decay occurs on expiry day, creating opportunities for sellers.

• Limited loss strategies, like buying a cheaper option to hedge, help manage risk in selling positions.

A Balanced Approach to Expiry Day Trading

Expiry day trading offers significant opportunities, but it is fraught with risks that demand a well-thought-out approach. For option buyers, the key is to identify stocks that can trigger sharp movements that drive the premium higher, while being fully aware of the risk of total loss. For option sellers, embracing strategies that cap potential losses, like using a limited loss strategy with hedging, can help manage the dangers of sudden market movements. Whether buying or selling, expiry day trading requires discipline, preparation, and a strong understanding of time value decay to succeed.

Highlights

• Expiry day trading offers both risk and reward, requiring careful risk management strategies.

• Option buyers should focus on targeting key strike prices while understanding the risk of total loss.

• Option sellers can benefit from time decay but must hedge their positions to limit potential losses.