Trading Options on Expiring Day?

Question

I have Feb calls on a AKS right now. The Jan calls expire today. The stock is up nearly 2% which would usually cause the call options to rise. The Jan calls are up but the Feb calls are all at a stand still, however, their volume is rising quickly. Why are the Feb prices not rising? Does it have to do with the Jan options expire today?
Thank you

I think you may have misunderstood the question. I am not asking why people trade on expiration day. I have a Feb Call, which is not expiring today. I want to know why the price is not moving much even though the stock is. Normally it moves with it. The volume is even rising, I don't understand. Is it because the Jan options are expiring today?

Answer 1

The implied volatility IV is calculated from the last two strike price changes. Statistical volatility SV is calculated as usuall. When IV is greater than SV the premium will actually come down. Buying options at this point will be fleecing.
In your case the Stock price is moving up meaning the IV is moving up and may be it is higher than SV for the February Call you hold and so there is less trading in it for being fleecing to the investor or nobody is prepared to buy at asked prices rather they opt for lower prices.

Answer 2

Folks who buy options on expiration day are generally doing one of four things. First, they are buying some to realize a loss to help offset the taxes on the profits they will make on something else. Second, they sold some naked options at full value and now they will cover their sale--a purchase will cancel the previous sale so they are off the hook (if someone exercised those options then the seller has to deliver some stock, which could be really expensive if you don't have it--which is called "naked"). Third, they want to exercise the options, as in call for the stock to be delivered at the agreed price, doing it just under the wire. Fourth, and finally, they haven't a clue what they are doing and just lost some money--OR, and this is important in some brokerages, they just bought themselves some stock. In some brokerages, until you say otherwise, when the options are about to expire the broker exercises them for you, so you have to cough up the striking price for the shares because you just bought a block (100 shares) per option.

Answer 3

Although you don't specify, the behavior of the feb call you are describing suggests that it's an out-of-the-money call.

This option is entering the final period of its life when its time value (the portion of premium that exceeds intrinsic value if any) will decay most rapidly. At expiration on the 3rd friday in feb, time value will be zero, as you know.

Rate of decay is related to IV of the option and other factors. You mention a 2% rise in stk price while feb calls remain at a standstill. Later in february, there could easily be days when stk will rise 2% but option will decline due to accelerated time value decay.

I recently answered a question like this. The party couldn't understand why he had paid more than $4.00 for a short-term call in november that was now worth only 2.30, although the stk had increased $.82.

In general, studies show that it's the buyers of calls and puts who tend to lose money. It's the sellers who stand to make money, because they are repeatedly selling the very time value that decays.

There are free study materials you can find, and several books you could borrow from your library or buy.

Good tutorials at http://www.888options.com
This is the Options Clearing Corporation, has little or nothing to sell.

An excellent free short book at the Montreal exchange, from introductory chapters to advanced explanations. Has an IV (implied volatility) calculator. Click publications, guides & strategies, equity options manual.
http://www.m-x.ca

Another IV calculator: http://www.ivolatility.com

Books include Lawrence Macmillan, Options as a Strategic Investment, and Mark Wolfenden, Short Book on Options.