Expiration Facts

With May expiration imminent, I figured it’s a good time to review some important expiration nuances.

1) Theta is highest during expiration week – When the bell rings Friday at the close of trading, there will be no option premium left in May options. This means long options are punished more this week and short options are helped more.

2) Gamma is highest during expiration week – The flip side of theta is gamma. Gamma is the rate of change of delta. Long options have positive gamma which means delta changes in the favor of the trader (longer as the stock rises, shorter as the stock falls). High expiration-week positive gamma really helps options owners. Short options, however, have negative gamma which means delta changes against the trader (shorter as the stock rises, longer as the stock falls). High expiration-week negative gamma really hurts options sellers.

3) Liquidity – There’s lots of trading in expiring options. Traders close options to avoid the problems mentioned in the first two points. Or they roll May options out the June to continue options after expiration. Liquidity is good for almost all investors and traders. Nice, tight bid-ask spreads mean less “given up” to the market.

4) Finality – Finally, after expiration options come “off your sheets”. They are either exercised (or assigned) or they expire. Either way, your winners are winners and your losers are losers. The trade is over.

Dan Passarelli

dan@markettaker.com