In yesterday’s Options Tribe meeting, tribe member Craig Wassenberg made an excellent presentation of his expiration Friday “pinning” trades. (For those of you who aren’t familiar with the term, a pinning trade is a trade that takes advantage of the tendency of certain stocks that become anchored to a particular options strike price on options expiration day.) It was an outstanding session, full of great information about the nuances of this intriguing trade.
Craig provided us with three full pages of pointers on how to become competent at expiration Friday winning trades. His first pointer was so important that he repeated it three times:
KNOW YOUR VEHICLE, KNOW YOUR VEHICLE, KNOW YOUR VEHICLE.
What Craig is telling us is that the options related to every stock, every ETF, every futures contract and every index has its own peculiarities. When you overlay those peculiarities on the really peculiar nature of expiration Friday pinning trades, it becomes critical to have a strong experiential grasp of the vehicles that you will be focusing on during expiration Friday.
How liquid are the options of that vehicle? What time of day does the stock typically tend to pin? What are the signs that a pinning process has begun for that stock? In what market conditions has this stock failed to pin in the past? Can you safely jump into the trade before the stock hits its pinning price, or is it critical for the stock to pin first before entering our trade? Is there a time of day where the stock typically “unpins” and then becomes erratic and dangerous? These are just a few of the reasons that it is important to know your vehicle.
The principle of “know your vehicle” is not limited to expiration Friday pinning trades. I’ve observed that all great options traders use this principle regardless of what strategies they employ.
This principle extends well beyond the options world, incidentally. You talk to any of the intraday equities traders here at SMB and they’ll tell you that they tend to trade certain stocks better than others. They have become familiar with the patterns and behavior of the stocks that they trade consistently and experience more success trading those stocks, over time.
In fact, this principle extends well beyond the trading world into most walks of life. Ever notice how successful many rookie pitchers are the FIRST time that they face a team that has never seen them pitch before? Ever notice how much better the hitters are the second time that they face that same pitcher? This is a case of “know thy pitcher”, no doubt.
The greater your familiarity with your vehicle of choice and the behavior of the options that are derived from that vehicle, the better you will trade that vehicle. It’s as simple as that.
Seth Freudberg
Director, SMB Options Training Program
The SMB Options Training Program is a program designed for novice and intermediate level options traders who are seeking an intensive training process to learn how to trade options spreads for monthly income. For more information on this program contact Seth Freudberg: [email protected].