How to Plan Your Options Trading Around Expiry Dates? How to Buy Options on Expiry Day

Trading options when they are nearing their expiry date can be risky at times. During this time, you could either gain or lose significantly. These deadlines are crucial because they persuade traders to make a decision. So, the closer you get to an options’ expiry date the more you are exposed to time decay. This time decay is known to reduce the value of an options contract substantially.

The Importance of Expiry Dates

The main reasons that expiry dates are so important are because of time decay and decision-making pressure as well as market volatility.

• Time Decay: Options contracts lose their value as they approach their expiry date. So how to trade options on expiry day? You can do this by properly planning out your options trades.
• Decision-Making Pressure: The expiry date is also important because it may persuade you to make a conclusive decision. To avoid losing out to time decay you should make this decision quickly. This can add pressure to your trading strategy.
• Market Volatility: When the expiry date of an option draws near, the market is usually the most volatile. This can bring its fair share of risks as well as opportunities. Choosing which option to sell and when can be the differentiator between profit and loss during such times.
• Effective Strategies for Trading on Expiry Day: To effectively execute trades on options’ expiry day you need to follow some of these strategies.
• Timing is Key: You should know when to exit a trade so that your profit margins are intact. For example, you may have bought a call option at a strike price of ₹500. Let’s say the price of this increased to 600 before its expiry. If you sell this call option at the right time, then you stand to gain ₹100.
• Manage Volatility: Manage Volatility by using strategies like a short straddle. In the short straddle you need to buy both a call and put option at the same strike price. So, you can make a profit whichever direction the underlying asset moves.
• Rollover Strategies: This strategy allows you to extend an options contract that is about to expire. You could maintain your market exposure by doing this. All you need to do is purchase the same option with a later expiration date and at the same strike price.

How to Trade on Option Expiry Day

Common Mistakes to Avoid

Besides these tips, you should also know some common mistakes when trading options on expiration day.

Ignoring Market News

You should always stay informed about the market. Ignoring the earnings announcements of companies could lead you to miss out on lucrative investment opportunities. You should also track quarterly turnovers of companies you are invested in. For example, you may miss out on the quarterly earnings announcement of a company at the end of a trading day. This could bring unpleasant surprises for you on the next trading day.

Failing to Manage Positions

You should also learn how to manage your positions depending on the expiration dates of the options you have purchased. If you want to learn how to trade on option expiry day, then this is one good way to do so. You need to monitor market volatility and accordingly manage your options (whether you want to buy, sell, or rollover).

How to Buy Options on Expiry Day

The best way to do this is to consider both in-the-money options and out-of-the-money options. You can determine this based on a market outlook. In-the-money options have intrinsic value. These options are often regularly chosen over others because they are safer around their expiration dates. Out-of-the-money options contrarily may give you better returns. This also means the risks are greater. The risk increases as the option nears its expiration date.

Conclusion

Stay informed about market conditions and to utilise effective strategies for trading around expiry dates. By understanding how to buy options on expiry day, you can improve your chances of success while managing risks effectively. The key takeaway is to be strategic and proactive, ensuring that decisions are made in line with market dynamics.