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20240226 ENDPOINT OPTIONS: WARRIOR GAME OR DOOMSDAY?
Expiration options (0DTE, Zero days to expiration), as the name implies, refer to options that are close to maturity and are cheaper than contracts with the same line option price in the distant month. In general, the closer the expiry date, the faster the value of options depreciates, and expiry options are like a commodity in a supermarket, so why do so many investors choose expiry options?
The higher the wind, the more expensive the fish, the richer the more adventurous. Late-day options are attractive, partly because they offer potentially high yield opportunities in the short term and have the advantage of being “small and loss-limited”. After all, it happens that end-of-date options flip several times and tens of times. However, if everyone is of a one-bet mindset, there is no basis for making end-of-date options trading, then only the end of the day is the end of the day, I'm afraid.
In this issue, Sir and everyone will talk about the concepts and practical methods of end-of-date options. If you are new to options, be sure not to miss out. The more you learn, the less you lose.
Warrior Games: Gamma Effects of Doomsday Options
In a wave of financial markets, the end date option is a game that only the brave dare to take part in. Because they have extremely high leverage, high liquidity, and small spreads. Simply put, it is high yield and easy to get out of hand.
Extremely high leverage
Because the time value is close to zero, the price of end-of-date options is lower, providing high leverage. This means that even with only a small investment, it is possible to obtain relatively large returns.
To understand the leverage effect of end-of-date options, you have to start from the Greek letters.
Delta and Gamma are important parameters for calculating the effect of stock direction changes on option prices. Delta measures the effect of stock price changes on option prices. For example, if the Tesla stock price moves $1, the Tesla option Delta value is 0.2 dollars, the Tesla option price moves 0.2 dollars. Gamma is a measure of the impact of asset price changes on Delta. For example, if the price of an asset varies by $1 and the option Gamma value is 0.25, then the option Delta changes by 0.25.
The closer the even-value option is to expire, its Gamma value can theoretically approach infinity. When the maturity date approaches, near-monthly flat options, or shallow dummy options, have a very large Gamma upside potential, which means that Delta will change rapidly even if the price of the benchmark asset changes only slightly. Therefore, the value of the end-of-date option has a very high sensitivity to the asset price of the benchmark, further magnifying the leverage effect.
Excellent liquidity and spreads
For those investors who are able to quickly analyze and react to market news, end-of-date options provide an opportunity to take advantage of short-term market volatility.
DUE TO THEIR HIGH LEVERAGE AND SHORT-TERM SPECULATION, LATE-DAY OPTIONS ATTRACT A LARGE NUMBER OF INVESTORS, SUCH AS INTRADAY TRADERS, MARGIN TRADERS AND THOSE SEEKING TO HEDGE SHORT-TERM MARKET RISKS. This diversity of participants ensures a high frequency of transactions, thereby increasing the liquidity of the market. High liquidity means a large number of buy and sell orders, which will naturally narrow the buy and sell spread. Because when there are large numbers of buyers and sellers active in the market, people tend to be willing to buy or sell at a price close to the market price in order to trade faster.
The End of the Road: Why End-Date Options Are Risky
Rapidly Decreasing Time Values
THE MAIN FEATURE OF EXPIRATION OPTIONS (0DTE) IS THAT THEY ARE CLOSE TO MATURITY, WHICH MEANS THAT THEIR TIME VALUE (WHICH REPRESENTS THE PART OF THE REMAINING TIME VALUE IN THE OPTION PRICE) IS VERY LOW AND DECLINING RAPIDLY. In this case, even if the option-tracked stock price moves only slightly in the opposite direction, it can cause the option to depreciate rapidly.
Highly sensitive to market volatility
Since the expiry date of the options is very close to the maturity date, even a slight change in the share price can cause significant fluctuations in the value of the respective option. This high volatility makes it more difficult and uncertain to predict the final value of options.
High leverage means high risk
Late-day options offer high leverage effects due to their lower purchase cost. This means that investors can control the value of a larger asset with a smaller investment. While this may magnify potential profits, it also magnifies potential losses, especially when markets are unfavorable to investors.
TRADING TIPS: HOW SHOULD EXPIRY OPTIONS BE TRADED?
Stop Profit and Loss
End-date securities are usually highly volatile, which means that their prices can fluctuate dramatically over a short period of time, with a difference of minutes, and yields will vary widely. Therefore, it is necessary to stop profits in time to lock in profit. Stop loss rules can limit hidden losses. When it comes to the end of the day, it's best to live up to your own mental expectations and avoid too much. Don't be out of balance, even if you keep selling your futures after you leave. End date options trading means winning.
Let's show everyone a real example. Sir made an operation on an Indira last night, because of the uncertainty of the transaction, and the option amount was larger than the 6% stop profit point that he had set for himself. Finally, there was a stop and break the score off the court. Although the option continued to rise again and again, it was no longer my concern. Making options, especially if you want to make money in fluctuations, must be fruitful and calm. Money can be earned slowly, but never lose.
Position Control
For options traders, especially for end-of-date options, it is imperative to control positions well. In general, most investors view options as hedging instruments and therefore control the positions of options to a very low range, such as 5%. Everyone can set options positions based on their investment goals and habits. In theory, whether it is a spendthrift strategy or a naked buy, everyone should consider whether the overall position remains fully manageable after a complete loss.
Buy or sell only
In the trading of end-of-date options, some investors choose to sell open positions in an attempt to earn some royalties as the option nears maturity. The effectiveness of this practice is not really high. Once the market shows a sharp reverse swing, the losses you face can go far beyond that meager royalty income. In other words, investors take huge risks for meager returns.
In contrast, buying a closing closing date option in a controlled position offers greater potential gains, although the losses are limited. Therefore, choosing to buy an end-date option rather than a sell open position is a strategy that balances risk and returns.
Equal value is first
When trading end-of-date options, it is often a wise strategy to choose between at-the-money, ATM or slightly out-of-the-money (OTM) options. This is because flat or shallow dummy options have relatively low prices and their Gamma values are larger.
The gamma value measures the sensitivity of the Delta value to asset price movements against the target. Equal or shallow dummy options with higher Gamma values mean that their Delta values increase rapidly with small changes in the price of the marked asset. Therefore, in the case of multi-gamma, that is, in the case of buying options, this type of end-of-date option may increase in value by multiples when there is a large movement in the market in a favorable direction.
Pay attention to the transaction
When trading end-of-date options, one must be aware of the liquidity risk of contracts on the day of maturity. Especially in the second half of the last trading day of options, close to closing time. If you hold an option with an expiry date and do not have an option plan, be sure to leave before expiry and it is best not to wait until the last moment of the trade to avoid losing rights due to failure to trade. Because as the closing time approaches, the liquidity of contracts may decrease, which may increase the risk of untraded. In this uncertain financial game, timely exit strategies are just like taking key steps in a complex chess game.
The world of end-of-date options is both complex and fascinating, and by buying flat or shallow denomination options, everyone can enjoy potentially high returns when the market shifts dramatically in a favorable direction. However, like any great game, the end-of-date option is just as risky, especially in terms of liquidity and time value. Therefore, timely entry and exit are equally important in this game.