The right way to trade options in expiry week: Shubham Agarwal

F&O Cues

You spot a breakout, stock’s moving up. You buy a call option, confident the momentum will carry through. Two days later, the stock hasn't collapsed. It's just sitting there. And your option? Down 20%. Welcome to expiry week, where even being right about direction isn't enough.

The clock is your enemy now. Every hour that passes, your position bleeds. You watch the premium evaporate while the stock does nothing wrong. This is the trap that catches traders who don't understand how time decay works near expiry. The real question isn't whether to trade. It's how to trade when time itself is working against you.

Why trading gets tricky near expiry

Theta decay is the silent killer of option buyers. It's the daily erosion of option premium, and it doesn't move at a steady pace. In the first two weeks of a monthly expiry, theta bleeds slowly. The third week, it picks up speed. The final week? It accelerates like a runaway train.

When you buy naked options near expiry, they bleed at the fastest rate. Two-three sideways days can wipe out 20% to 30% of your position, even if the stock hasn't moved against you. This is why naked option buying near expiry is a losing game.

What's the solution?

Strategy 1: Directional trades with spreads

Stop buying naked options. Instead, buy one just-in-the-money option and sell another slightly out-of-the-money option.

Eg:

Let's say you're bearish on Infosys trading at 1,368 (lot size 400). Buy the 1,380 put at Rs 28 and sell the 1,340 put at Rs 12.

Your maximum loss: (28 - 12) × 400 = Rs 6,400

Your maximum profit: [(1,380 - 1,340) - (28 - 12)] × 400 = Rs 9,600

Risk to reward: 1:1.5

Why this works: You're buying an in-the-money option, which has less theta decay. You're selling an out-of-the-money option, which has more theta decay. The premium you collect offsets part of your cost.

If the stock moves your way, the ITM option gains value faster than the OTM option you sold. You profit from the move while theta works in your favor on the short leg.

Best part? You know your maximum loss and profit upfront. No emotional roller coaster. No panic exits.

Strategy 2: Intraday option writing

Since theta decays fastest near expiry, flip the script. Become a seller instead of a buyer.

Sell both a call and put near at-the-money in the morning. Hedge them with wider out-of-the-money options to cap your risk. Square off the position by 3 PM to avoid overnight risk.

You collect premium from both sides. As long as the market stays range-bound, theta decay works for you instead of against you. The hedges protect you if the market suddenly breaks out.

The bottom line

Near expiry, the rules change. Theta decay stops being background noise and becomes the primary force destroying your trades. So adapt your strategy. Use spreads for directional bets. Sell premium intraday when you expect consolidation. Let theta work for you, not against you.

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