by HSeldon2020
I realized that I had not actually devoted a post to this –
Concept:
If a $100 stock has a call option at the strike price of $99, it should be worth $1 – however, since options are almost never at perfect parity, you will have to pay a premium. That premium is a combination of Time and Volatility (and other elements that aren’t significant enough to warrant mention). The more time left before expiration and/or the higher the volatility, the more you will pay in premium. Thus, if you were to buy that $99 strike Call for the $100 stock on a Monday (with expiration that Friday), it might cost $1.95 as an example.
However, if you were buying that option 20 minutes before expiration, there would be almost no time, or volatility (less uncertainty with little time left) and the price of the option would be very close to $1.
Thus, on Friday’s, roughly an hour before expiration ATM or just OTM options are extremely cheap. If AAPL was at $149.80 with 50 minutes before the market closes, the AAPL 150 Strike Calls would most likely be offered for around .05-.10 cents each.
Execution:
The first thing to keep in mind is that these are called Lottos for a reason – they are low probability/high reward plays. As such, you should not be committing a large amount of your account balance towards this method. They are fun and can be profitable, but they can also be costly if you get too carried away with it. While Lottos are usually played from the Long side, you can also reverse these instructions and do Put Lottos as well.
The following conditions are needed:
1) You need a market pullback of some sort. Nothing major, just a dip in SPY. Preferably this happens about 60 minutes before close. During this dip you need to look for the stocks that have been strong throughout the day, and hold up well as SPY is dropping. Can you do Lottos without this pullback – yes – but it is very difficult, and creates even a lower probability of success.
2) Once you have those stocks that held up, look up the available Lottos – so sticking with the example, let’s say AAPL is up $1.25 on the day, and currently sits at $149.80. SPY drops from $467.80 to $467.20 and during that drop, AAPL goes from $149.80 to $149.75, which shows a good level of Relative Strength Against SPY. You see that with 50 minutes left, the AAPL $150 calls are going for .06 cents.
3) Once you see SPY begin to rebound, AAPL should surge stronger proportionally to SPY. This is when you buy those $150 Strike calls – for the sake of the example, you get them for .07 cents, and you buy 10 of them (which is $70).
4) These options will move quickly, so you need to base your decision on when to sell on the price action of the stock. You are also racing against time decay as well – every second the price of the stock remains below the strike of your option, it is decreasing towards $0. However, if you see AAPL quickly climbing, and the options are now worth .14 cents with the stock at $149.98. You can take the 100% gain here. Or, if you feel based on the chart that AAPL is going to continue, then you can hold the Lottos as the stock goes past $150. Once the Lotto goes ITM, the Option will move with the price of the stock.
You can imagine with a stock like TSLA how an option can go from .45 cents to $4.50 in the matter of minutes – giving you a 10X profit.
Note:
Be Patient. You will be tempted to jump in early on these, which is almost always a bad idea. Obviously, there are times when you will catch a stock with a lot of momentum, but it is almost always best to wait until the final hour.
Tell your broker! Most brokers will sell your positions around 30 minutes before the market closes if you are holding options that could expire in-the-money. If you are hold 10 TSLA calls for a $1050 strike, and TSLA is currently at $1048, your broker is not going to take the chance that you will be assigned 1,000 shares of TSLA – so they’ll close the position. However, if you tell them you are monitoring your Options, they will give you more time.
Have fun!
Best, H.S.
Disclaimer: This information is only for educational purposes. Do not make any investment decisions based on the information in this article. Do you own due diligence or consult your financial professional before making any investment decision.