Expiry Day Trading: Shubham Agarwal discusses the secret behind zero to hero Options

F&O Cues

We all hear stories on every expiry about that one option that went from Re 1 to Re 250. The logic is not very complicated. Let us understand the secret behind those zero to hero options hiding in the systemic drivers that push the premiums up.

For any expiry-symbol combination, there are multiple Call and Put options bearing different strike prices. These strike prices can be divided into 3 major categories.

ATM (At the Money): Strike close to the current market price.

OTM (Out of the Money): Call Strikes higher than the current market price and Put Strikes lower than the current market price.

ITM (In of the Money): Call Strikes lower than the current market price and Put Strikes higher than the current price.

We will concentrate on 2 drivers that move option premium.

1. Price of the stock / index

2. Time left for Expiry

On the day of expiry, the second element will impact the most as already limited time is now passing fast to become zero. This results in a rapid decrement in premiums caused by the passage of time. Most of the expiry day traders take good advantage of this fall by selling OTM Call and Put Options.

Price is pretty straightforward, rising prices will help the Call premium go up and falling prices will help Put premiums to go up.

This is all very simple but when the very limited time left to expiry and the price move get combined magic happens and Heros are born. To understand this, we need to understand the following line.

This may not make a lot of difference during the course of the expiry but on the last day of the expiry when the time-related decrement in premium is at its pace and making just a tiny move of 3-5 percent becomes a limited probability because the stock/index has just a few hours to do so.

In such a situation, despite every small rise, the Call premiums may not rise in the race against time.

Unless the stock/index approaches the strike and the OTM option now becomes ATM.

(stock rises to Call option strike or falls to Put Option Strike).

Now the probability increases from almost 0 percent to 50 percent so does Option Premium.

This systemic change changes everything. The option that could not have had a chance to expire with any value may now end the expiry worth some money. The systemic factor that makes this happen is known as Gamma which is the pace at which the probability of expiring ITM moves. The phenomenon is also known as Gamm Explosion.

Utility: Choose a higher strike Call in a Rising Stock / Lower Strike Put in Falling Stock that you foresee as becoming an ATM. You have a potential Zero to Hero on your hand.

Remember, it is the law of nature that these Options will have dramatically lower success rates but then if there is a Re 1 to Rs 10 possibility you just need a 20 percent success rate to double your money.