Caveat Emptor : Let the Option Trader Beware
Last Minute Option trading gives tremendous opportunities but be extremely cautious when you are dealing with such contracts. Especially if the contract has a high probability of ending In The Money. The options that expiry In The Money usually attracts a very high Securities Transaction Tax.
HOLDING OPTIONS TILL LAST MINUTE
Option contracts which are very near to expiry firstly carry a very high Gamma Risk, Especially if you are holding naked option without any hedge then for sure you are inviting Gamma Risk.
“If you try and milk out every last penny of an income trade, you will run the risk of getting cut by the gamma knife edge and letting profits turn to losses in the blink of an eye.”
In a case of High profit or loss, it is very tempting to carry till the last penny or opportunity. Especially with weekly options, one has to be extremely careful.
OPTIONS OPEN INTEREST
You must have some solid reason to hold the option on the last day of expiry. However, with positive gamma option trade, you might beat the gamma risk to some extend. Perhaps one should not forget to check the open interest. Lack of open interest in the options would lead the option to get exercised.
Option with zero value or Out of Money Option may not face the heat. But option with In The Money would definitely have a tough time. Most of the options At The Money look mispriced at the last moment of expiration the main reason for this is STT risk has been included into this. Most new traders avoid this or fail to understand this and for getting the profit of the last paisa pay the price of the option expiring In The Money.
Lessons to be Learnt from Curious Case of Chirag Gupta who made a Profit of Rs. 6 Lakh only later to realize and receive an invoice of Rs. 24Lakh.
Positive Gamma trading strategies could lead your option to expiry In The Money. “Acceleration” is usually referred to gamma in stock option greek management. If you are long Gamma you want the underlying to move very fast for a fast profit. This along with mispriced option during last day of the trade is a perfect combination for your option to quickly expiry In The Money.
Never get into theoretical option pricing trap to earn pennies just before the option expiry. Many traders fall into the expiry STT trap by not closing their positions and letting it expire In The Money. The charges of STT if the In The Money Option is closed before expiry is approx Rs. 6. Then if the option is exercised In The Money then approx charges would be Rs. 600.
Perhaps you have been wondering why you are getting highly billed by your broker for your Option Strategies.
Review your strategy and then go through the article again to have a better understanding. You would have made some fundamental mistakes in selecting the strategies.
If that is the case now is the right time to make necessary adjustments and save from making losses.
Nevertheless, the impact of implementing these corrections the time and other resources you spend in making these adjustments. You might not see more profit with these corrections but definitely, your capital is not going to erode.
Have you experienced this earlier? With this fundamental change have you corrected your strategy? Would you recommend this to a newbie Option Trader? Let’s hear your thoughts in the comments below!
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Also published on Medium.