Options tribe member Craig Wassenberg\u00a0 and I were corresponding as usual last Friday as the July monthly\u00a0options expiration day had arrived. I asked Craig what he was watching\u00a0 and his reply was not surprising–many of the usual suspects including GOOG,\u00a0 AAPL\u00a0 and BIDU.<\/p>\n
Craig was concerned\u00a0 about trading\u00a0 GOOG,\u00a0 given its monster reaction to last week’s\u00a0 earnings–not the safest environment for a trade that requires little to no movement.<\/p>\n
AAPL\u00a0 had a a huge amount of open interest at\u00a0 the 360 call strike\u00a0\u00a0 contradicted by\u00a0 a\u00a0 large accumulation of open interest on two different put strikes. He was also not thrilled with AAPL’s lack of independance from the overall\u00a0 market–a factor he\u00a0 usually looks for in pinning trades. Craig felt these mixed\u00a0 AAPL signals were a little dangerous and contradictory and so he passed on AAPL on Friday.<\/p>\n
BIDU was a different story. Craig thought that BIDU was telling him that it wanted to pin to $145\u00a0 and so he jumped in and out of a BIDU iron butterfly\u00a0 trade with a nice profit\u00a0 over a very short period of time \u00a0 Friday afternoon.<\/p>\n
As it turns out, AAPL\u00a0 did in fact\u00a0 pin at 360\u00a0 for several hours,\u00a0 which is not shocking given the overwhelmingly large amount of open interest at that strike compared to any other strike on the options chain that day. A brief successful\u00a0 theta positive trade was possible in the afternoon on Friday, up until 3pm, when there is\u00a0 a tendency for stocks to “unpin” and take off, \u00a0 sometimes\u00a0 dramatically, in one direction or another. That is exactly what happened to AAPL at around 3pm on Friday afternoon.<\/p>\n
In an exchange over the weekend,\u00a0 Steve Spencer\u00a0 (partner at SMB and day trader extraordinaire) \u00a0 suggested to me\u00a0 that perhaps the energy pent up from the pinning process is unleashed late in the day on expiration Friday, causing a big move in one direction or the other–exactly what happened in the upward burst late Friday afternoon with AAPL.<\/p>\n
Which then begs the question–is this phenomenon an opportunity or a problem? I think it can be both. If the adept expiration Friday trader sticks to his\/her discipline and exits before the dangerous final hour, a nice theta positive profit can be pocketed over a very short period of time.<\/p>\n
It strikes me that flipping the trade and going LONG a straddle at 3pm on expiration Friday, might not be a bad idea, particularly if the trader is feeling that a move is likely but the direction is murky.<\/p>\n
What do you think? How would you play the pent up energy on expiration Friday on a stock that has pinned for several hours as is ready to uncoil?\u00a0 Would you buy a straddle, or just pick a direction and buy the appropriate call or put (or call or put debit spreads) as the case may be?<\/p>\n
Seth Freudberg<\/p>\n
Director, SMB Options Training Program<\/p>\n","protected":false},"excerpt":{"rendered":"