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Feb 16th is an exciting day

February 15, 2007

I mentioned in my past posts about the expiration day opportunities that can be categorized into two types i.e. Directional and Non-directional trades

I am going to cover non-directional part with respect to pinning of stocks. For the beginners who are wondering what is pinning, it simply means, the tendency of stock’s price to close near the strike price of heavily traded options as the expiration date nears. There are a lot of good studies conducted on why pinning takes place; you may Google “Pinning of stocks” to get more understanding. Here is a brief analysis of Google for the past 5 months and projection for tomorrow’s action.   

  • Sept 15, Pinned ~ $410, Oct 20, Pinned ~ $460
  • Nov 17, Pinned ~ $500, Dec 15, Pinned ~ 480, Jan 19, Pinned ~ 490
  • Feb 16, probably it will be pinned around $460 unless something exciting happens overnight that cause Google to either gap-up or gap down.

Here is the chart with my comments–  Google Pinning Analysis

Other observation worth noticing is that $460 is currently a technical support area. It may bounce back from here next week and therefore, in my opinion, there are 2 opportunities 1) pinning and 2) benefit from the stock’s movement from Monday.

How to play pinning: I experimented this in December and played an Iron fly that generated 29% profit. Check out the details. Also in the same post, there is a chart which shows very clearly that after lunch Google continued to move in horizontal line. You may want to paper trade first to have a feel on how it behaves.

Adam has identified several candidates XOM (~$75), GE(~$35), MSFT(~30), MO (~85), T(~35), VZ(~35), and add Goog to list (~460). Check out his excellent post.

Profitable trading,
OptionPundit

9 Comments

  • Optrader says:

    What do you call an iron fly? Never heard of it. Where can I get a description fo the strategy? Thanks.

  • OptionPundit says:

    Just google it…or look at the post..and with the trade details you may figure out how a Iron Fly is configured 🙂

  • Optrader says:

    I undertand the trade, but would like to look at risk/reward etc..Does it go with another name? It is not in the strategy screener (the tool you linked to) and if I google it I only get your blog 🙂

  • Optrader says:

    I looked at the simulated trade and it is very similar to a calendar spread. Why not just do a calendar spread? This way, if, like you said, there is support at $460, you are left with a naked call on Tuesday. or you can close tomorrow.
    Are you planning on opening this trade today or wait for tomorrow morning? Might be less attractive tomorrow morning but you avoid the possibility of a bad surprise overnight.

  • Optrader says:

    OK, I found it, it’s a “Short Iron Butterfly”. In fact it is short a straddle and long a strangle. The opposite of an Iron butterfly.

  • OptionPundit says:

    Iron Butterfy is one bull put spread and one bear call spread, the short strike being the same. This a butterfly trade and you collect the premioum upfront vs normal butterfly.

    OP

  • Tom says:

    OP,

    Your Iron Fly play is just on the last day? Open the trade in the moring,
    and close it right before the market closes?

    Tom

  • chiu says:

    Also look at GS and SHLD, for the past four months. This happens :

    GS : Jan07 210.29, Dec06 199.84, Nov06 194.88, Oct06 180.4
    SHLD : Jan07 179.52, Dec06 175.09, Nov06 172.98, Oct06 174.76

  • OptionPundit says:

    optrader, I think u forgot to give full details of the trade and the name of the company. Well by now the market is already closed, I wish you all the best and wish you make money when the market opens tomorrow.

    Tom, yes. The Iron fly is opened only on the last day I didn’t want to take chance of “surprise” due to any event. The theta is not worth taking the chance for one night.

    Chiu, thanks for sharing GS and SHLD. I shall surely look into it and hopefully OP readers also get it to benefit from the pinning.

    Profitable trading, OptionPundit

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