Deep insights about Expiry Day Trading

Deep Insights about Expiry Day Trading

EP 3

While it might seem rational to short options on an expiry day, one should be fully aware of the risks associated with it, before taking a dive. If one line can explain the risk and return profile of option selling, it’s this “Eat like a chicken, shit like an elephant”.

Increased rate of theta decay on expiry days is a fact, but it shouldn’t be seen on its own. The Option Greek ‘Gamma’ plays a vital role in expiry day – intraday trading and one should have a sound understanding of the relationship between ‘gamma’ and ‘theta’. Let’s dive deep into the Option Greek ‘gamma’, relationship between gamma and delta and how it can affect your trades.

Gamma:

Gamma showcases the rate of change of delta. Delta represents the change in the option’s premium for a unit change in the underlying price. Gamma represents the change in the option’s delta for a unit change in the underlying price. A higher delta value indicates that the delta value can change drastically with minimal price changes in the underlying.

At-the-money options tend to have the highest gamma indicating that their deltas are the most sensitive to the underlying’s changes.

Shorting options & Gamma:

A higher gamma can amplify the risk for option sellers as it indicates increased volatility and it is the last thing an option seller wishes for. A short-uncovered option has a higher risk and a higher gamma increases this risk further. While this scenario can be favourable to an option buyer where movement of the price in the favourable direction is crucial for ending up in profit, as ITM & ATM options expire worthless.

Gamma Explosion:

Gamma explosion is the term used to express the sudden and insane changes in the premium of the option. For example, ₹ 1 option will turn into ₹ 100 option in matter of seconds. This phenomenon occurs when the underlying asset experiences a sudden or unexpected change in price, specially when the expiry of the option contract is near or around the corner.

How to take advantage of gamma explosion:

Gamma is a double-edged sword, which can get you striking profits and match it with losses of the same scale or more. The vital thing is to identify an instrument which has the potential of moving into a next higher call strike or next lower put strike.

This is where platforms like Quantman & InstaOptions come in handy. Quantman is an algo trading platform which helps intraday traders to backtest their strategies which showcases crucial data like Winning probability, Max P/L, Average P/L, Profit & loss heat map for the backtested timeframe and drawdown data.

InstaOptions is a cutting-edge options trading analytics and insights platform, using which you can find pivotal data and features like Combined premium charts, Basket order facility, OI data like strike wise OI accumulation, OI change data, trending OI, excellent order execution.

With the aid of the best analytical tools we can identify a stock which has the above said potential and jump into the trade with a stop loss to avoid adverse losses. If things go as predicted, the premiums will gain 2x to 3x in value in case of a gamma explosion.