Option Expiration

Recently, I've started to play option expiration. I will position myself 1-2 weeks out on options that I think will expire worthless. My bet is that certain stock candidates will be 'pinned' to a particular strike. With that belief, selling options on these stocks will benefit from accelerated time decay and hopefully some sweet profits if the options expire out of the money.

What I like about this play is that the results are almost immediate. Within a week, you will know whether you are right (assuming you hold the position to expiration). Secondly, the risk/reward can be substantial assuming you cherry pick the right stocks to play. I typically look for at least 3 or 4-1 risk/reward ratio. Because the option decay is so fast this last week of expiration, the profit curve can quickly move in your favor to the max reward zone. Of course, if you are wrong, you can quickly lose your entire investment. This is where position sizing and risk management is important.

I key off of technical levels to determine where I would get out for a loss. I intend to hold until option expiration barring a stop loss so I can squeeze the max potential out of the trade. With these trades, you're either dead wrong about the zone in which the stock will end up or absolutely right within a week so it's important to be disciplined and adhere to stop losses.

Some keys things I look for. 1) Tight bid/ask. 2) Stay away from stocks announcing earnings the week of (or industry related cousins). 3) Technicals (support/resistance) has to corroborate my idea of a potentially range bound stock. 4) Nice to have open interest indicating a possible pin play.

Also, one of the ways I have found good candidates have been after a news driven event that has moved the stock. Afterwards, the stock is usually range and would be a potential candidate.

So far, my picks have been about 50% winners. For 1 unit of risk, I make about 3-4 units. If I can keep at this rate, it will quickly add to big gains.

Two candidates I have for this week was HD and APOL. Already HD has stopped out for a loss. APOL is looking good as it looks like it might pin at 60.