All about expiry day trading with real time examples
All about expiry day trading with real time examples
EP2
Expiry day trading:
Expiry day trading is the new phenomenon in the options trading community which gained huge traction prior the pandemic. The introduction of weekly contracts in the late 2010s and the increased retail participation after covid-19 made intraday trading during expiry days famous for both good and bad reasons.
Risks involved in expiry day trading:
The general notion is expiry day trading is favourable to option sellers due to the increased rate of theta decay. While it is true given that other factors are on a favourable side, the level of volatility that can be expected on the expiry day amplifies the risk involved to a great extent.
Advantages of expiry day trading:
The predominant advantage of expiry day trading is the increased rate of theta decay which favours the option sellers to a great extent. If you’re confident about a movement, opting for a directional strategy would be a rewarding option if the prediction turns out true.
Common expiry day trading strategies:
Following are the commonly used strategies by traders. We will backtest these strategies over a 3 year period (2021 – 2024) using Quantman. Quantman is an algo-trading platform which offers backtesting as well as live algorithmic trading features. The reason for selecting this specific time frame is because of how volatile the markets have become post covid and also to see how these strategies would endure in current volatile markets. The lot size for all strategies discussed below is one.
Short Straddle:
A short straddle is the strategy of choice when you expect the market to be neutral or range - bound. A short straddle involves selling both a call option and a put option with the same strike price and expiration. It is a delta-neutral strategy where the delta of both the call and put is near 0, which means for small prices changes near the strike the price of the option doesn’t change much. Now we can see the backtest result of short straddle strategy
The above picture shows the results of a vanilla short straddle with 25% Stop loss on each leg. It is deployed only during expiry days and at 9.20 AM to avoid initial volatility of the market.
Short Strangle:
Similar to a short straddle, a short strangle is also a delta neutral strategy which is deployed when the market is expected to be range bound. But unlike a straddle, a short strangle involves selling a call option of a higher strike and a put option of a lower strike. But the chances of pocketing most of the premium received is high with strangles if held until expiry.
Similar to the straddle this is vanilla short strangle, shorting OTM 2 of PE & CE with 25% Stop loss on each leg. It is deployed only on expiry days and at 9.20 AM to avoid initial volatility of the market.
Bear put spread:
A bear put spread is a vertical spread which consists of buying a put option of a higher strike and selling a put option of a lower strike. A bear put spread is opted in the anticipation of the underlying falling in price. It is net debit strategy which requires initial outflow of cash. The shorting of the put option reduces this initial outlay but also puts a limit on the potential profit which can be expected from the strategy. If the underlying becomes range bound it long put will expire worthless.
Here we have backtested a bear put spread, buying a ITM 2 put & shorting a OTM 2 put with 20% stop loss on each leg. The instrument is bank-nifty and it is deployed only on expiry days at 9.20 AM.