I do it on etf stocks! It works well for me. I think it is too dangerous with stocks particularly if you were to do it on the eve of exipration. I have also thought to do it for the DOW (Trading expires on Thursday and outcome is based on Friday open), but I do not trust the opening prices and the calculation done by the dow (DJS?).
They may manage it by trading the underlying if necessary(negative gamma scalping). Unless the settlement is in cash, the difficult part from my point of view would rather be the pin risk.
I can say it's a form of short dispersion trade. The fund is one of the largest buy-side option players. Their emphasis is the expiration and rollover trade. They've averaged >100% each year since mid 2004. I am proud to state that I planted the seed for the basic strategy, although they've done better than I thought possible. I have no connection with the fund -- my wife and brother in law invest in the fund.
Ugh. No, pin risk is the goal. Virtually all of the trades result in assignments. I thought that was obvious. A pinned-position is ideal.
When thinking about a strategy it's important to use ACCURATE numbers, not some trumped up number to make it look more appealing. The 10% OTM call is in the $0.01 range, a far cry from $0.20 as you stated. To get a decent premium you have to sell the 1 strike OTM at about $.40 as of Thursday close, they should be a lot cheaper on Friday Feb 15. Also to sell the 10-20 contracts you will need a lot of margin.
I assume the automation then sends out orders to close the enormous stock positions on Monday? Do they sit around on kill time on ET between each expiration just to put on that one killer size of trades?
Aren't they short both puts and calls at same strike? If underlying stays around strike how do they know which side will/will not be assigned? You must have given them some smart ways to do things. Do they pay you royalties at least? PS: I assume that you can not say the name of the fund. If you can I would be interested to know. I was looking the other day at IBD, and some guys were saying they are the best in performance (80%). The fund you mentioned should beat them hands down, and I like clever strategies such as you alluded to.
They don't know, but pinned positions result in less than 30% notional exposure through assignments. They model the risk, but the pinned-positions will generally perform best and the empirical data has shown it to be the case. Yes, I have signed a non-disclosure doc. I received a one-time consulting fee, but I am happy to reap the benefits through participation. My contribution was simply to mention that automating a "strike touch" expiration strategy would likely be profitable.
I just re-read what you wrote. So what I understand now is that pin is an objective in this case. I am intrigued...Must be something real smart here...
Remove that and their cash machine may go silent. You should have patented your idea. You seem to be a smart guy and I hope you do not underestimate your ideas too much in the future. But glad that you are receiving.