Every expiry day brings news of that one option transforming from a tiny Re. 1 to an amazing Rs. 250. The allure of such success stories often attracts traders, prompting them to decipher the hidden systemic drivers that let premiums reach such extraordinary heights. In this blog, we take a look into the curious concept of the Zero-to-Hero strategy on expiry day, unwrapping the secrets behind these wild price surges and exploring the factors that contribute to the working of options trading.
Understanding Option Strike Categories
Options come with various strike prices categorized into At the Money (ATM), Out of the Money (OTM), and In the Money (ITM). The ATM strikes are close to the current market price, while OTM strikes are outside the current price range, with Call Strikes higher and Put Strikes lower. Conversely, ITM strikes are within the current price range, with Call Strikes lower and Put Strikes higher.
| Category | Description |
| ATM | Strikes close to the current market price |
| OTM | Call Strikes higher and Put Strikes lower than the current market price |
| ITM | Call Strikes lower and Put Strikes higher than the current market price |
Option Strike Categories
Key Drivers of Option Premium Movement
Two primary factors drive option premium movement: the price of the underlying stock or index and the time left until expiry. On the day of expiry, the impact of the latter becomes most pronounced as time is rapidly dwindling towards zero. Traders often leverage this time decay by strategically selling OTM Call and Put Options.
The effect of the stock or index price is more straightforward – rising prices boost Call premiums while falling prices elevate Put premiums.
The Key Combination: Time Left for Expiry and Price Movement
The magic unfolds when the limited time left to expiry combines with price movements. On expiry day, time-related premium decay accelerates, compelling expiry day traders to capitalize on the fall by selling OTM Call and Put Options. However, a profound understanding of the relationship between time, price, and option premium is crucial for unlocking the potential of the Zero to Hero strategy.
Option Premium Rises on Probability of Option Expiring ITM
Here’s the key insight: option premiums rise based on the probability of the option expiring In the Money (ITM). While this concept may seem straightforward, its impact becomes monumental on the last day of expiry. During this critical period, even a marginal price movement of 3-5 percent becomes a limited probability due to the scant hours remaining.
In this scenario, the time decay may outpace the rise in Call premiums, making it challenging for traders to capitalize on small price increases. However, a transformative event occurs when the stock or index approaches the strike, turning an OTM option into an ATM option.
Gamma: The Game-Changer
This systemic shift is driven by a factor known as Gamma, which represents the pace at which the probability of expiring ITM evolves. The phenomenon is aptly named Gamma Explosion. As the stock or index nears the strike, the probability of the option expiring ITM increases from almost 0 percent to 50 percent, propelling the option premium to new heights.
| Factor | Impact on Premium Movement |
| Price of Stock/Index | Rising prices boost Call premiums; falling prices elevate Put premiums. |
| Time Left for Expiry | Accelerates time decay, particularly pronounced on expiry day; increases the attractiveness of selling OTM options. |
Factors Driving Option Premium Movement
Zero-to-Hero Strategy in Action
To apply the zero-to-hero strategy, traders can choose a higher strike Call in a rising stock or a lower strike Put in a falling stock that is anticipated to become an ATM option. This strategic move hinges on the understanding that the limited time left for expiry and the incremental price movement can exponentially increase the probability of the option expiring ITM.
In the world of options trading, the Zero to Hero strategy on expiry day suggests narratives of rapid transformations and extraordinary gains. While the success rates of these options may be dramatically lower, the allure lies in the possibility of turning a Re 1 investment into Rs 10 or more. Remember, even with a modest success rate, the potential for substantial returns remains significant, making the Zero to Hero strategy a compelling option for traders seeking to capitalize on the dynamics of option pricing. As with any trading strategy, thorough research, risk management, and a keen understanding of market dynamics are paramount to success.
Let Streetgains Be Your Guide
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