Understand Expiry Day Option Buying Strategy

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  • 27 Oct 2023
Understand Expiry Day Option Buying Strategy

Options empower you to leverage your positions and manage risk effectively in the financial market. One compelling strategy at your disposal is the act of buying options, with expiry day lending a particularly intriguing dimension to this approach. This strategy is known as the option expiry day strategy.

An expiry day option buying strategy entails acquiring options contracts to profit from fluctuations in the underlying asset’s price on the options expiration day. These strategies specifically target options with expiration on a designated day, commonly known as expiry day. Short-term traders and speculators predominantly employ this approach to exploit brief price movements.

Within options contracts, two fundamental types prevail: call options and put options. Call options empower the holder to purchase the asset on or before the expiry date. Conversely, with put options you have the right to sell the underlying asset before or on the expiry date.

Here’s how this strategy works:

Suppose the stock of Company ABC will experience a significant price increase on its expiry day, just a few days away. So, you:

  • Begin by selecting the appropriate call option. Consider factors such as the strike price, the option’s premium, and the time remaining until expiry. Opt for a strike price that you anticipate the stock can reach or surpass on expiry day.

  • Having chosen the call option, proceed to purchase it. This grants you the right to buy Company ABC’s stock at the strike price on or before the expiry day.

  • As the expiry day approaches, vigilantly monitor the stock’s price. Your option becomes profitable if the stock price rises and surpasses your call option’s strike price.

  • On expiry day, if the stock price is favorable, you can exercise your call option, acquiring Company ABC’s stock at the strike price. Alternatively, you can sell the option contract if it has gained value.

If the stock price doesn’t move as anticipated, a potential loss is limited to the premium paid for the option. You retain the choice not to exercise the option if it remains out of the money.

To Sum Up

Expiry day option buying strategies present exciting opportunities, but it’s crucial to consider them within the context of a comprehensive trading or investment plan. Building a well-rounded and sustainable portfolio requires adhering to key principles such as diversification and effective risk management. Before venturing into options trading, especially if you are new to derivatives and financial markets, always seek advice from a professional advisor.

FAQs on Option Expiry Day Strategy

Expiry day trading refers to the last date of the contract, after which it’s not valid. It’s primarily used in the derivatives market.

Option expiry day refers to the date and time when an options contract is rendered null and void.

The market’s volatility and unpredictability make expiry day trading a strategy with high risk and high potential rewards.

It will significantly lose its value if you cannot buy, sell, or exercise your option before its expiration date. The option contract stops trading upon expiration and either gets exercised or becomes worthless.

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