Trading Options at Expiration

I recently read Jeff Augen's book on Trading Options at Expiration and would like to know whether anyone has had success creating any supporting empirical data to support the claims.

I think it's an interesting approach and am willing to allocate capital to it but I can't seem to methodically generate the individual trading opportunities or quantify the risk.

Has anyone tried to implement what Augen proposed?

Thanks,
Xicaju

 

I believe the theory here is to take avantage of gamma by going long gamma. This is the week where gamma's influence actually outweighs theta's influence. I see a couple ways to play it. My favorite is to look for companies announcing earnings during expiration week. Generally, a quick pop will increase gamma, but you need to see it and take advantage of it. Let's suppose that Apple is announcing earnings expiration week. Let's suppose you expect an upside surprise. So, buy a call before the announcement (like the monday before exp friday). Say it announces on Wednesday and the stock pops. You immediately sell the stock and lock in a profit. Don't look for huge profits. Obviously, the risk is that the pop has to be greater than the premium paid; only upside risk is opportunity cost. Actually, if the stock reverses and drops below the strike, you profit as well--again as long as the drop is more than the premium.

 

Your comments make sense to me. Thanks for adding them!

I wonder whether this "strike magnet" theory holds water in a magnitude substantial enough to base a trading strategy. I would like to believe so, however, I need to get more comfortable.

Theories of prices holding around psychological levels, or whole numbers is easier to digest than underlying prices gravitating toward the nearest strike price.

Opinions?

 

Augen wrote an article for last May's SFO Magazine about an IV pattern on expiration day for stocks over $50 with large open interest, He stated that barring major news, IV tends to increase until 11 AM, drops toward noon, levels off for 2+ hours and then drops sharply into the close. He suggested that long positions may be best suited for the AM and short positions for the afternoon (straddles and possibly ratio spreads might be a good idea.

Was this the gist of what was in his book?

 

There are a gazillion theories on what will make money in the market.
The trick is to find one that works well for awhile

 

You've never lived until a stock beats earnings and pins your call butterfly's sweet spot.

 

That's titillating but the piece de resistance is holding short stock (of value) on a company that announces bankruptcy.

 

"You've never lived until a stock beats earnings and pins your call butterfly's sweet spot. "


Sounds like RIMM.....

 

The movement on expiration day is part of the book, but he also covers 'pinning' statistics, proposes ratio positions to take advantage of greek dynamics that fall outside of the pricing model, etc...etc...it's a very short read and IMO pretty good.

The concepts he mentions in the book sparked some ideas of my own which I do trade on expiration week (not day)

 

Thanks for the Cliff Notes version of the Augen book

The expiration pattern intrigued me but I just never seem to find enough time to observe and anylyze it to determine if it has realistic trading possibilities.