If someone turns in and says, “I made a 100 per cent return on investment this expiry,” then please don’t be shocked! Yes! With the help of the Expiry Day Options Strategy, one can make a remarkable profit. But wait! It involves risk, too!
Before diving into the options strategy that you can implement on the expiry day, let’s first understand what an expiry is.
The term “expiry” in the Indian stock market usually refers to a derivative contract’s expiration date. Financial contracts, known as derivatives, obtain their value from an underlying asset, which could be a stock, commodity, or money.
Futures and options are two of the most traded derivatives in India. Contracts for futures are promises to acquire or sell an underlying asset at a predetermined price and later date.
Options are effective financial tools that let you control risk and leverage your positions.
Speaking about options yet further, we have Nifty and Bank Nifty, also known as stock and index options. The expiration of weekly Nifty Options is on Thursday, whereas the weekly expiry of Bank Nifty is on Every Wednesday.
In today’s blog, let us discuss how to trade and implement an options strategy on the expiry day:
Table of Contents
5 Factors To Consider When Trading For Expiry Day
Some factors to consider when trading for expiration day-
1. Know the Expiration Date
The expiration date of the options contracts you are trading should be known. By doing this, you’ll be able to steer clear of any unpleasant surprises and make wise trading choices.
2. Monitoring Market Conditions
Prior to the expiration date, pay special attention to the state of the market. Keep an eye out for any events or news that might have an effect on the price of the underlying asset.
3. Using Technical Analysis
Finding levels of support and resistance, as well as possible trends that can influence the asset’s price movement, can be done with the help of technical analysis.
4. Planning Your Trades
Create a trading plan including profit targets, stop-loss orders, and entry and exit locations. Adhere to your strategy and refrain from acting on impulse when trading.
5. Managing Your Trades
Because expiry-day trading has some risk, it’s critical to manage it by sizing up your bets and employing stop-loss orders to cut down on any losses.
Why are selling options profitable on the expiration day?
Theta decays more quickly on expiration day, when all out-of-the-money options expire worthless, offering options sellers a 60%–70% chance of winning.
An option’s value inherently decreases as its expiration date approaches, so you need to predict not just the direction but also the timing of the stock’s movement accurately.
The value of the option decreases with each day that goes by without the underlying asset seeing any notable movement.
Expiry Day Options Strategy
Now let us discuss some options strategies that you can implement on the options expiration day-
1. Identifying the Trading Range
Support and resistance can be distinguished by open interest. The highest put or call OI strike will be regarded as support, and the highest call OI strike as resistance. This could be the possible trading range for the Nifty and Fin Nifty expiry day.
Use a stop loss (individual or combined leg) or purchase an OTM call and put to turn the strangle into an iron condor in order to lower risk.
2. Short Straddle
With the same strike price and expiration date, traders sell both put and call options in this technique. The strategy’s goal is to make money off of the underlying asset’s stagnation.
3. Short Strangle
With different strike prices but the same expiration date, the trader offers both put and call options for sale. The strategy’s goal is to make money off of the underlying asset’s stagnation.
4. Iron Condor Strategy
In this technique, call-and-put options with the same expiration date are sold at different strike prices, and out-of-the-money (OTM) options are purchased as a hedge and protection.
The possible profit and risk are determined by the separation between the two strike prices. If the underlying asset stays between the two strike prices, the options will expire worthless, and the trader will keep the premium.
The premium is earned when the options are sold. The investor could, however, incur losses if the underlying asset climbs above either strike price.
All things considered, expiry-day trading can be a difficult but possibly successful tactic. Before using this approach, traders should be disciplined, patient, and knowledgeable about the state of the market and options pricing.
Watch our webinar on LIVE Bank Nifty Expiry: Directional and Non-Directional Option Trades
Frequently Asked Questions (FAQs)
Can we trade options on expiry day?
You have the opportunity to execute your call option on expiration day and purchase Company XYZ’s stock at the strike price if the stock price is favourable. As an alternative, if the option contract has appreciated in value, you can sell it on the open market.
Should we trade on the expiry day?
Owing to the market’s volatility and unpredictable nature, trading on expiration days can be a high-risk, high-reward plan. Only after having a solid understanding of options pricing, the market, and risk management strategies should trades be made.
What happens on the expiry day?
When traders modify their holdings, the market becomes more volatile as the expiry date approaches, signifying the settlement of the F&O contracts. This frequently leads to significant changes in stock values; close to the expiration date, prices are also impacted by appraisals of underlying assets and arbitrage trading.