Friday option trading is all about finding that money, and that's exactly what we did today in GOOG. This is possible because the stock already has a market maker's expected move built into the price of the options. This expected move is considered to be the 1st standard deviation. So, if you were to place a trade at the 1st standard deviation level, then the probability of that option expiring worthless is already 68%.
Market maker's are interested in making money, so they price the options at 1, 1.5, and 2 standard deviations out at a price they are willing to sell. This puts the odds greatly in their favor, and the option buyers are statistically throwing money away.
On Friday mornings (expiration day) we can come in and do the same thing the market makers are doing for the highest probability trades, and essentially pick up some free money.
Here's how it was done today:
GOOG had nice morning move to the upside that was very low volume. At the time we sold the 1020/1025 call spread the stock had topped out for the day, and was on the decline. We were able to sell the spread to our hopeful buyers for .30 ($30) per contract. Since price = probablity, our chances for success on the trade were instantly 94% (cost of the trade / width of the spread) which is well outside the expected move for the day, and as you can see, GOOG closed at 1016.03. That left us profitable for very little risk in addition to a 6.4% ROI (return on investment).
Yes, you do have to put up margin for this trade, but that is as close to free money as it gets. In hockey we call this a garbage goal, and I would take this all day. :)
