To The Moon

Tiger app has launched a new feature: Daily Options, which are now available for trading on three index ETFs including $SPY, $QQQ, and $IWM. This feature offers investors more trading options and allows options traders to take advantage of short-term price changes without needing to hold positions overnight.

Due to their shortened maturities, midweek-expiring options have a unique trading nature. Let me explain in detail.

Risk warning:

Please be aware that option trading can be complex. Before participating in option trading, it's important to have a good understanding of options, be familiar with trading rules, and fully understand the potential investment risks. Additionally, investors should be aware of other risk factors and conduct a thorough risk assessment before making any financial arrangements. This can help you avoid significant losses that may result from participation in options trading.

1.Daily Options

A daily option is an option contract that expires midweek or even at the end of the current trading day, and has a shorter expiration date than a standard option contract. Normally, the expiration date of a standard stock option contract is the third Friday of the expiration month. By offering an additional expiration date, midweek-expiring options provide traders with more opportunities and flexibility to adjust their positions.

The Tiger app offers midweek-expiring options on the SPY, QQQ, and IWM three index ETFs:

Experienced options traders often discover the value of midweek-expiring options and take advantage of their potential for great returns. Midweek options offer three key trading advantages:

1. Profit Potential

midweek-expiring options allow traders to make quick profits if they correctly predict the underlying asset's price movement. Since these options expire the same day, traders can profit from short-term price movements without holding a position overnight.

2. High Liquidity

midweek-expiring option are highly liquid, with a high trading volume and tight bid-ask spreads. This makes it easier for traders to enter and exit positions quickly and at a favorable price.

3. Flexibility

Since midweek-expiring options are available every day, traders have more flexibility in their trading strategies. They can take advantage of short-term price movements, react quickly to news events, and adjust their positions based on market conditions.

2.Options Expiration and Price Behavior

Using daily options effectively can result in higher profits, but it also comes with additional risks. Doing the same options strategy in the daily options cycle compared to the 45 DTE cycle yielded between 5 to 6 times more premium collected. However, on a day-to-day basis, the same move in the market resulted in roughly 30x greater risk for the midweek-expiring options compared to the 45 DTE strategy.

Investors must understand the two key elements of the break-even point: time value and volatility.

As the expiration date approaches, the time remaining until expiration becomes a critical factor in the pricing of the option.

One key factor that impacts the pricing of options contracts as expiration approaches is time decay. Time decay refers to the fact that as an option gets closer to its expiration date, its time value decreases. This is because there is less time remaining for the option to move in the desired direction and generate a profit.

But when the rate of decay Theta will be at its largest, the extrinsic value of the option will approach 0. This can provide option buyers with an advantage as options will be at their cheapest. 

Another factor that impacts the pricing of options contracts at expiration is volatility. Higher volatility can lead to wider price swings and greater potential profits, but it also increases the risk of loss. As expiration approaches, the impact of volatility on the price of an option can become more pronounced, particularly if there is a sudden change in market conditions.

Several key considerations:

1. Selecting the appropriate expiration date: Which offer greater flexibility and can be more responsive to market movements.

2. Identifying potential price movements: Traders should analyze market trends and identify potential price movements that could impact the value of their options positions.

3. Developing a trading plan: A trading plan should include specific entry and exit points, risk management strategies, and profit targets.

4. Managing risk: Risk management is a crucial element of trading options at expiration. Traders should use stop-loss orders, position sizing, and other techniques to minimize their risk exposure.

5. Monitoring market conditions: Traders should continuously monitor market conditions and adjust their trading strategies as needed.

3.Popular Daily Options Trading Strategies

The main strategies investors use to trade daily options include buying them for scalp trades and selling them to collect premium. 

Generally, selling midweek-expiring options is the most popular, as any midweek-expiring option that is out-of-the-money (OTM) upon expiration will be worth nothing. Since expiration is the same day, betting on them ending OTM is a high win rate strategy.

However, the market can be highly volatile, and even if the option ends up expiring at 0, you may see significant unrealized losses throughout the day. 

Iron Condor

The iron condor strategy involves selling both a put credit spread and a call credit spread simultaneously on an underlying stock or index. This strategy is designed to take advantage of a range-bound market, where the underlying asset is expected to trade within a specific range until the options expire.

The maximum loss on this strategy is limited to the difference between the strikes of the sold call and put credit spreads.

The iron condor has a high probability of profit since it makes money as long as the underlying asset stays within the range by the end of the day. The maximum profit is limited to the net credit received when the trade was put on.

As with all midweek-expiring options strategies, the iron condor requires active management since the trader needs to adjust their position if the underlying asset moves outside the defined range, which can quickly happen in a midweek-expiring options trade.

Iron Butterfly

The iron butterfly strategy is a neutral strategy typically used when a trader believes that the price of an underlying asset will remain stable within a certain range and volatility will remain unchanged or drop.

This strategy involves selling an at-the-money (ATM) call option, and an ATM put option simultaneously, creating a short straddle position. In addition to selling the short straddle, the trader also buys further OTM call and put options with higher strike prices, creating an iron butterfly.

Like the iron condor, the maximum profit and loss are defined upon the trade entry.

However, iron butterflies allow you to collect a larger premium upfront, since you are selling the expensive ATM options rather than OTM options. Since the max loss is generally not very high, traders may be more likely to hold iron butterflies until the end of the day or take profit when they collect 25-50% of the premium. 

Margin settlement:

It is worth noting that Tiger only supports settlement after 3:00 pm on the trading day following the expiration day (excluding weekends and holidays) for these options. After settlement, the margin will be released, which will affect the purchasing power of the HongKong stock market, Singapore stocks, A-shares, and other markets the next day. Therefore, when making a purchase, please be sure to arrange funds flexibly in advance to avoid settlement risks

Automatic exercise will occur for stock options due within current month and at a price of USD0.01 or above, but close position will occur as per market price if the investor’s margin does not confirm to the exercise conditions, which is prexamited 2 hours before the market closes. If it is impossible to close out at market price due to insufficient liquidity or other causes, Tiger retains the rights of the invalid options, which process will result in the loss of entire value of such options.

FAQs — Option Trading

Website: https://www.tigerbrokers.com.hk/help/detail/81322347?lang=en_US&_sasdk=fNDEyNTEyMjMyNTM4NzY2Mg

Risk warning:

Please be aware that option trading can be complex. Before participating in option trading, it's important to have a good understanding of options, be familiar with trading rules, and fully understand the potential investment risks. Additionally, investors should be aware of other risk factors and conduct a thorough risk assessment before making any financial arrangements. This can help you avoid significant losses that may result from participation in options trading.