Chapter 1Expiration Pricing Dynamics

Equity and index options expire on the third Friday of each month.1 The final hours of each expiration cycle are characterized by unusual market forces and price distortions that, properly exploited, provide outstanding trading opportunities. These distortions are caused by the breakdown of traditional option pricing calculations that depend on volatility and time decay to fairly represent risk. As a result, options are unavoidably mispriced during the final few days.

End-of-cycle price distortions represent a market inefficiency that cannot easily be exploited by large institutions for reasons related to liquidity and execution efficiency. The trading strategies outlined in this book scale to hundreds, ...

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