Wednesday, May 18, 2016

Tactical Option Trade

This is not my kind of trade, and it is definitely not strategic. However, there may be a decent risk/reward in the expiring SPY options. SPY as many of you know is the largest option market in the US, and has all sorts of feedback with actual stock prices. The options that expire this Friday have an abnormal open interest at the 205 strike.

Strike  OI
195      178K
200      149
205      393
210      201

Many of you have already noticed that, in the absence of new fundamentals, prices tend to go to the strike with heavy OI. There is good reason for this. As time to expiration goes to zero, the near-the-money options have very high gammas. For example, on expiration day if it's above the strike the delta is near one and near zero if it's below. So holders of these options tend to hedge as it moves around the strike. There is also an incentive for large option traders to pin it to the strike: they can trade on the Saturday following the last trading day on the Board, while retail cannot.

So the trade is to sell the 205 straddle. Obviously this is picking up pennies in front of the steamroller. But if you keep the size low and determine to do it every execution day, it does have a nice trade profile. I'm not doing it; it doesn't square with the name of this blog. But maybe you should?


  1. Hello Burton,

    How about a tutorial on the oil/gasoline crack spread and how to predict movements in the spread as well as if that truly benefits the refineries and their stock prices?

  2. Hi Anon. I have been working on something related to this. I'll have more in a near future post.


Comments are welcome, although I can't promise to answer every question.