Expiration Selling

One play that can generate almost sure wins is to write options that will expire in just a few days. (You still want to write options that are comfortably out-of-the-money.)

After I taught an old friend Frank (he had made millions in the stock market over the years) to trade options, he fell in love with the options game; he usually writes only naked put options with the intent of buying the stock, a concept we will cover in a
later chapter.

However, if he can find a buyer, he, too, likes to write expiring put options.

Now why would someone want to buy an option that is about to expire and has little chance of paying off? The key is that he is buying these options to close a position due to a margin call or to free some capital.

What Frank does is put in a lot of option writing orders and position his limit price above the present bid price in the book.

Then the next buy order will go to him.

Two examples may help. When Honeywell’s merger with General Electric fell through, Honeywell dropped to 37. With one day before expiration, the HON Aug 30 put had a bid of .3 and an asked of .8.

Frank put in an order to sell 10 HON Aug 30 puts at .40 ($40), and at the end of Thursday’s trading, the order was
filled. This is a 99% play. Honeywell would have to drop 7 points in one day after already hitting a temporary bottom before Frank
could lose.

Of course, Frank pocketed the money. In the next expiration month of September, he did the same thing and put in an order to sell 10 Pfizer (PFE) Sept 30 puts at .10 ($10) when Pfizer was at 35.

Someone bit at the order and bought the options at .10 with only a few hours before expiration. You could say that the $100 he received for writing the ten options was not much, but that is a free $100, the closest you will ever get to a sure thing.

To be successful at this play, you have to have a lot of patience and put in a lot of orders in the last two or three days before
expiration.

One word of caution, one danger with all naked writing plays with stocks is that they have surprise volatility and can move in a chaotic pattern, so there are no absolute sure things.

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