Options tribe member Craig Wassenberg and I were corresponding as usual last Friday as the July monthly options expiration day had arrived. I asked Craig what he was watching and his reply was not surprising–many of the usual suspects including GOOG, AAPL and BIDU.
Craig was concerned about trading GOOG, given its monster reaction to last week’s earnings–not the safest environment for a trade that requires little to no movement.
AAPL had a a huge amount of open interest at the 360 call strike contradicted by a large accumulation of open interest on two different put strikes. He was also not thrilled with AAPL’s lack of independance from the overall market–a factor he usually looks for in pinning trades. Craig felt these mixed AAPL signals were a little dangerous and contradictory and so he passed on AAPL on Friday.
BIDU was a different story. Craig thought that BIDU was telling him that it wanted to pin to $145 and so he jumped in and out of a BIDU iron butterfly trade with a nice profit over a very short period of time Friday afternoon.
As it turns out, AAPL did in fact pin at 360 for several hours, which is not shocking given the overwhelmingly large amount of open interest at that strike compared to any other strike on the options chain that day. A brief successful theta positive trade was possible in the afternoon on Friday, up until 3pm, when there is a tendency for stocks to “unpin” and take off, sometimes dramatically, in one direction or another. That is exactly what happened to AAPL at around 3pm on Friday afternoon.
In an exchange over the weekend, Steve Spencer (partner at SMB and day trader extraordinaire) suggested to me that perhaps the energy pent up from the pinning process is unleashed late in the day on expiration Friday, causing a big move in one direction or the other–exactly what happened in the upward burst late Friday afternoon with AAPL.
Which then begs the question–is this phenomenon an opportunity or a problem? I think it can be both. If the adept expiration Friday trader sticks to his/her discipline and exits before the dangerous final hour, a nice theta positive profit can be pocketed over a very short period of time.
It strikes me that flipping the trade and going LONG a straddle at 3pm on expiration Friday, might not be a bad idea, particularly if the trader is feeling that a move is likely but the direction is murky.
What do you think? How would you play the pent up energy on expiration Friday on a stock that has pinned for several hours as is ready to uncoil? Would you buy a straddle, or just pick a direction and buy the appropriate call or put (or call or put debit spreads) as the case may be?
Seth Freudberg
Director, SMB Options Training Program
2 Comments on “AAPL “unpins” at 3pm on Friday–problem or opportunity?”
Well, if you buy the straddle you’ll need net movement to one side, and also a sufficient degree of net movement. This is (need it be said?) extremely risky with time to expiration being ONLY ONE HOUR.
Probably makes more sense to look at overall market conditions, specific security (e.g., PCLN, GOOG, etc) movement characteristics (strong/weak) intraday, pick a candidate and direction (buy calls or puts), and get out if the trade begins to move against you. I”ve done this on expiration Fridays using weeklys on PCLN, BIDU, GOOG, AAPL, etc. Often times you lose a quick 10-15%, but other times you make 2-3x your money. It’s all about the percentages.
An even better play is to buy a long strangle (i.e., not ATM) the afternoon (say, Thursday @ 3:45 pm EST) before expiration Friday on the above names. Immediately set a limit order to sell it GTC for the next day at 2-3x the strangle cost basis and I’ve found about 80% of the time I get a fill the next day. Sometimes a big gap (like with the Japan nuclear disaster) will see your order get immediately filled on the open, one time I caught a 10-bagger on PCLN using this method. Works especially nicely with PCLN and GOOG, but there are others. Nice thing about this is it’s NOT QUITE as short theta and delta-sensitive as your suggestion.
In any event, massive risk is being taken with these strategies, so of course the potential returns appear (and sometimes are) quite attractive.
BTW, I’m on the options desk of a large commercial bank, so during the day I juggle dealing with customer order flow and trading my own account :o)
Fun times.