Yes, getting markets to behave how one wants for just two days on the spin is pretty hard.
A lot of options waste away because the underlying market keeps making the nice moves which of course drums up interest, but then reverses that move the next day or two.
At the end of the week, the market is back where it started, and what started as a slightly OTM option to start with still ends up worthless, which I think is what Coral is getting at.
I've noticed over the years that any move 2-3 days before expiry tends to be reversed in that final day. If one is taking profits therefore, one should not be leaving it to "last day" to do so, lest that profit actually disappear altogether - very easy when the option is only a few ticks ITM with 24 hours to go.
Options on futures can be handy here, as I am able to short the same number of futures (even if beyond my normal limits) to offset an in the money option I may have on LAST DAY ONLY. This prevents "premium rape" because by doing this I collect the straight intrinsic value of the option for the cost of an extra lot of commission opening a new multi-lot futures position to lay off as it were. I've done this many times in the grains & gold too. The Broker will not countenence this on any day but last day in case in case I get a large margin call on the newly acquired large futures position, which I am unable to raise funds for by making a closing sale of the long options, due to premium rape and general illiquidity. Last day on the other hand guarantees that I will be either closing the futures at a profit, OR excercising an ITM option to get rid of the futures at a profit too. It IS of course possible to take a large futures position thus "insured" and make a lot more than the current intrinsic value might suggest:-
Example:
4 days til expiry:
Buy TEN 15 point OTM calls for about 2-3ticks.
Expiry day: Options are now 11 ticks ITM.
Short TEN march futures against that held option position.
(1) Market then tanks by the close, finishes 30 points below the strike.
Options expire worthless, you close out the futures on the other hand at a 41 point profit - far more than the 11 points it was in the money by earlier on that same day. You won't get "raped" on the futures liquidity, as it actually increases on option expiry days.
(2) Market rallies strongly, but no matter how high it goes, you don't take a hit on the futures (just sold-off upside) since you excercise the options to cover your short at a 11 point profit. Only disadvantage is two lots of commission.
Of course if I can't get the position set up for 2-3 ticks, I won't be taking it on to start with. One big advantage of latter-day options is that if one buys just as the "penny pinchers" crush the premium, then you might just get a nice cheap (oversold) premium in the last week or so prior to expiry. Obviously one is on the bid here, not attempting to buy these at market, although occasionally some fool does go on the offer for pennies, and see how quick they get snapped up! We're talking near OTM options with few days left NOT massively OTM options here.
"I'll buy a gold bar for a dollar, but I wont go long turds, even if all the experts say that it is a sound momentum play, and in a strong uptrend!"
"Life is about one's personal evalutation of situations, and if you end up with a box of chocolates, then watch less TV and more charts instead!"
"Sir, when turds become money, the poor of the world will have sewn-up ar$eholes!"
