Why is Options Trading more risky on the expiry day?

Short Answer

Options trading involves many factors such as Options Greeks. Options Greeks like Delta, Theta, and Gamma have the most impact on Option prices towards the end of the expiry. The option premiums are impacted highly by Gamma and Delta on the day of expiry. Learn more about Options greeks and how they impact option premiums.

Detailed Answer

What is Expiry in Options?

Options are mere contracts that are traded with the promise to exchange the underlying on a particular date. This particular date till when the option contracts are valid is known as the Expiry date. Sock options expire on the last Thursday of every month in India. Index Options such as Nifty & BankNifty have weekly options that expire every Thursday. In the same way, Options traders have to either square off their positions or take/give delivery of the underlying on the date of expiry.

Why is options trading risky on the date of Expiry?

Options trading is considered risky on the date of expiry due to two main reasons, which are-

1.Options expiring In the Money

On the date of expiry, if you have any open ITM (In The Money) stock options. And by the end of the day, if you forget squaring them off. You will have to take/give delivery of the underlying shares as per your position. For example, if you had an ITM Call Option of Reliance Industries then you will have to buy 1 Lot of Reliance at the given price. That turns around to be somewhere close to Rs 5,20,000. In the present climate, 5.2 lakh might not be so easy to fund for a small retail trader. Due to this reason, it is advised to square off any Option Positions before the date of expiry to prevent any complication of Delivery.

2.Gamma Effect

Every Options contract is made up of two components. Intrinsic value and Time value. The time value diminishes completely by the last hour on the expiry day. Due to this, the Options are only traded on their intrinsic value. Now, Gamma increases on the expiry day. Gamma is an Option Greek that denotes the change in Delta. Due to the increase in Gamma, a 50 point move in the underlying can cause to Option price to swing as high as 45-50 points. Due to this phenomenon, OTM Option prices that are extremely cheap can sometimes end up getting ITM. In this situation Option traders especially Options sellers tend to lose a lot. A cheap option of 4-5 rupees can end up getting 60-70 rupees within minutes due to a massive swing in the underlying. This might be beneficial for an Options buyer as the increase in the premium can turn out to be profitable for an Options buyer. But this has its own dangers. If an Options buyer buys an OTM (Out of The Money) stock option and if it goes In the money.The problem to take delivery arises. liquidity can be low in ITM options resulting in the obligation to undertake delivery.

Conclusion

Due to the following reasons, options trading especially option selling is considered risky on the day of expiry. There are some ways in which you can minimize these risks. Firstly trade in Index Options (Nifty, BankNifty) as here you are not under the obligation to carry out the delivery. In this way even you have an ITM Option, you can leave it withing worrying about taking delivery. Secondly, you can square off all your Options trades 2-3 hours before the expiry time. By following this, you can evade the high volatility in the last couple of hours.

Tagged With: Options TradingGammaTheta DecayIn The MoneyCall OptionPut Option
Categories: Option Trading
Ask your query and our expert community would be happy to help
Discussion (0)
Related FAQs

What is Call Option and Put Option?

Options are a form of conditional derivatives policy that allows the holder to buy or sell the key asset at a fixed price before or after the agreement expires. The two most impactful options are Call Options and Put Options.

How does Gamma affects risk in Options trading?

Gamma is an Option Greek that affects the change in the Option premiums. Options traders need to know about Gamma and some other Option greeks to calculate the risk per trade. The effect of Gamma becomes stronger as the expiry approaches. The Gamma also increases as an Option becomes ITM or ATM from OTM. Know more about it here.

Which Options Greeks should you know about before Trading Options?

Options Premiums are primarily made up of two values. Intrinsic Value and Time Value. Whereas the change in the price of the Option premiums is dependent on five factors called Option Greeks. These are Delta, Gamma, Theta, Vega, and Rho. Know more about options greeks and which Greeks should a trader keep an eye on while trading Options.

Which strategies should a Options Buyer use to make money?

Option Buying is more common when compared to options selling. This is because option buying requires less capital and the maximum profit is uncapped. This lures many small retail traders who ultimately lose money when it comes to options buying for various reasons. Follow these strategies to increase your chances of generating profits.

What is Delta Gamma Theta Vega in options?

Option Greeks are the financial indicators. Delta, Gamma, Theta, Vega are the option Greeks and deals with different variables such as price, maturity, volatility.

Which is the best time frame for Options Trading?

Options Trading is a risky business and options traders have to look at various parameters before taking a trade. Choosing a time frame is one of the factors in options traders. Both option Buyer and Sellers use different time frames to trade. Let's see which time frame is most useful for options buying as well as selling.

What is Uncovered or Naked Options Trading?

Naked or Uncovered Option trading is a type of trading/speculating where a Call or Put option is bought or sold by different individuals at the same time expecting different price direction movements. Naked Option trading is a Zero-Sum game which means that the Profit for one is a Loss for the other individual.

Can I trade in US Options from India?

Yes, individuals can trade US options from India. There are many platforms as well which allows the individuals to trade internationally, it just depends on them what they are comfortable the most with and prefer trading from.

Are puts riskier than calls? Risks to Consider

Puts are Calls are both risky in their own terms. For calls it is necessary to make decisions well as there are chances that you make loose the premium. In case of puts it is important to strategize the the options well.

How much money do you need to begin Options Selling?

Option Selling requires large capital. Due to this many small retail traders resort to option buying where the margin money required is very less. Although with various strategies you can reduce your overall risk and margin required in Options selling. Know more about how much money is required to start option selling. The difference in the margin money required for selling a naked Option vs Selling a Hedged Option here.