Options expiration was always an exciting day for me when I was in the trading pits of Chicago.
Expiration days can see wild price action and huge levels of orderflow as traders look to close out their expiring positions and roll them to the next options expiration.
While this can create opportunity for savvy options traders it can also create traps for traders who do not understand options market dynamics as well.
It can also create price action in the stock market that can affect your other positions. Below I will go over some special considerations you should make on expiration Friday and how you can avoid common pitfalls related to ignoring them.
Managing Your Options Positions
If you are holding options positions that expire you need to manage those positions so you can guarantee you will not take settlement.
Most traders do not realize that the threshold for automatic exercise is only $0.01. This means that if you have an options position that is $0.01 in the money it will be exercised and you will end up with stock.
If you take long or short stock over the weekend this massively increases your overall risk.
This happens because the market is closed on the weekend and does not have the chance to digest any news, headlines, or other catalysts that might happen on Saturday or Sunday.
This can create large gaps in a stocks price on Monday’s open, causing you to lose more in a position than you thought you could.
There isn’t much you can do to mitigate this risk other than exit all positions on Friday.
This means that you need to be in front of the screen on Friday and have to stay there until the close. Unfortunately, expiration Friday is not a day where it’s okay to leave early.
Options Tape “Noise”
Expiration Friday generally sees an increase in options volume as institutional traders roll their options positions to the next expiration.
This can create a lot of “unusual” looking orders on the tape. You need to be careful however as these trades are not always the types of unusual options activity signals we are looking for.
A lot of the rolling action that happens is coming from traders who are simply looking to reposition a hedge. That’s not the type of action you should be following.