EQD Research: Traders Taking Full Advantage Of Multiple Option Expirations

The big trading news in Chicago, for people over a certain age (including me), was CME Group announcing a majority of the trading pits are to be permanently closed. This led to many older market participants recalling their first time on the trading floor, the energy felt when entering the floor each day, etc. The trading world has evolved due to technology with the closing of the pits being a casualty of technology, but many aspects of trading have improved due to technology. One area that it has had a significant positive impact is through the introduction of multiple option expirations.

Historically, the third Friday of each month was option expiration week. Much like the CME pits, this is more of an example of how things use to be done than how they are today. Any active option market has contracts available for trading that expire each Friday for the next few weeks. This allows traders the ability to pinpoint their trading to match up with a certain event or time frame better than in the past. Also, this allows traders the ability to take positions that will expire in just a few days.

Some markets, like the Nasdaq-100 (NDX), have options expiring multiple times a week. Barring a holiday, NDX options expire every Monday, Wednesday, and Friday each week. There are strategies that are very attractive based on an option expiring in the next day or two and now those opportunities are available multiple times a week. Just this past week there were several block NDX option trades that were initiated with little time remaining to expiration and held through expiration.

On Monday May 3^rd, about 20 minutes into the trading day, a trader sold over 400 NDX May 3^rd 13920 calls for 15.60 and purchased the same number of May 3^rd 13940 calls for 11.10 taking in a credit of 4.50.  NDX was near 13,880 when the trade was executed.  As long as NDX closed under this level the trade realizes a profit equal to that credit, while the risk to this trade was a loss of 15.50 if NDX finished the day over 13,940.

Note the closing price for NDX is well within the area where the maximum profit on this trade was realized.  Another Monday trade that focused on how NDX fared over the course of the day was executed about 90 minutes into the trading day and again used the options that expired on the close the same day.

With NDX at 13,815 a trader sold almost 300 NDX May 3^rd 13730 puts for 3.38 purchasing the same number of May 3^rd 13700 puts for 2.13 taking in a credit of 1.25.  The payoff on the close is displayed below.

The dollar risk for this trade relative to the reward is pretty substantial with a loss of 28.75 incurred if NDX is below 13,700 at expiration. This price was never in danger as NDX spent the balance of the day near 13,800.

On Tuesday May 4^th a large vertical spread using the May 7^th NDX options was executed when NDX was around 13,440. The trader sold 4000 NDX May 7^th 12800 puts for 13.70 and purchased 4000 of the May 7^th 12750 puts for 12.30 taking in a credit of 1.40. The following payout is based on the trade being held through the close on Friday May 7^th.

This trade did risk 48.75 to make 1.25 per spread, but the short strike of the spread was 4.75% lower than where NDX was quoted when the trade was executed.  Also, this trader probably did not worry too much over the course of the week as the low for NDX over the life of the trade came shortly after the trade was executed at 13,396.11. The final outcome for this trade was a good one as NDX finished the week at 13,719.63.

Finally, on Friday the 7^th a trader put on a 200 bull put spreads expiring the same afternoon in two separate trades of 100 each.  The first lot occurred with NDX at 13,780 selling the NDX May 7^th 13640 puts for 6.00 and the buying the May 7^th 13630 puts for 5.30 resulting in a net credit of 0.70. A couple of hours later with NDX at 13,750 the 13640 puts were sold for 6.50 and the 13630 puts purchased for 5.80, again resulting in a credit of 0.70.

This trade worked out well with NDX closing at 13,719.63 on the day and the lowest NDX print falling at 13,669.78. The low of the session may have been uncomfortably close to the short strike of this spread, but did not prompt an exit trade.

These are just a few of the short dated NDX spreads that were executed and expired last week that would not have been possible without multiple expirations available during the week. The CME pits may be a victim to technology and some of older traders will shed a nostalgic tear or two for what use to be. However, the majority of market participants continue to benefit from more ways to trade and they can thank advances in technology for these new opportunities.