8. Trading the Weekly Options Expiration

Expiration provides unusual trading opportunities because traditional option pricing methods are unreliable when the amount of time remaining is very short. For example, the fair value at 4:00 PM Thursday for an at-the-money call on a $100 stock trading with 45% implied volatility is $0.94 if the next day is expiration. The same option, however, would be worth just $0.49 the next morning when the market opens at 9:30 AM. A trader purchasing this option on Thursday must be aware that overnight time decay will destroy nearly half the remaining value while a seller must somehow protect himself against the large impact of a relatively small overnight price change—if the underlying price rises to $101, the ...

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