Friday is fast becoming my favorite day of the week. And it’s not because it’s the beginning of the weekend. It’s because of Friday Lotto Options! This is a strategy I’ve been utilizing week after week, especially when it comes to Amazon.com(AMZN), which I have been reading like a book over the last couple of months.

Most options on stocks expire on a Friday. Typically, weekly and monthly options settle at the close of trading at 4 pm on Fridays. An exception is options on the S&P 500 index (SPY) and other indexes, which can have mid-week expiration dates. Given that there is very little time on a Friday before options expiry, this can present some unique trading setups.

The Smart Money

Market makers, the guys who provide most of the liquidity in the options market by sitting on the bid and offer, are like the house in the casino. And most of the time, the house wins because the odds are in their favor. There are some folks who are often called the “smart” money— and as an active trader, I want to know what smart money is doing—to stay competitive in the market.

I do this by looking at the options chain and open interest. I look at the open interest at various strike prices to gauge how market participants are positioned and what the smart money is likely to do.

For example, I have been watching and trading AMAZON.com (AMZN) very closely over the past several weeks. And what I’ve noticed is over this recent time period is AMZN has tended to sell off or at least stay range-bound as the smart money market makers look to collect as much options premium as possible. By reading the options chain, I can see where a large number of options contracts have been sold and thus the range which AMZN might trade in. Here’s how I did that last week-

The Options Chain and Open Interest

As can be seen in the options chain above, there was a large number of options contracts sold between 3320 and 3330. There were about 5000 contracts all-up sold at this price level, much more than at most other price levels. I interpret these figures in this way: The smart money market makers have sold a lot of calls throughout the week between 3320 and 3330 to call buyers who are hoping AMZN goes higher. It is in the market makers’ interest to make sure that AMZN closes at or below this level to collect the premium paid to them by options buyers.

Think of it this way, hypothetically 5000 contracts sold represents 500, 000 shares. If they were sold throughout the week at an average price of, let’s say, $10, that’s $5million at stake for the smart money market makers. That’s 5 million reasons for market makers to make sure AMZN stays below this price level. Over the years, I’ve learned to follow what the big smart money is doing, so that is why I sold 100 call spreads at the 3330 level. Here are my trades:

The Trade

As you can see from my trading Journal, I sold 100 of the 3330 calls for around $7.05 and bought 100 of the 3340’s for around $4.25. Thus I received the difference of $2.80 from call buyers for taking this position. So long as AMZN stayed below $3330, I would receive this premium. If AMZN closes above $3340, I would take a max loss of $10- $2.80 of $7.20 on my position.

I expected AMZN to trade around $3300 on Friday as, in my opinion, that represented the area of max pain for options buyers. Max pain is a term used to describe the price point at which most of the call and put buyers will lose on their positions, benefitting the market makers who sold those options the most. AMZN ended up closing a little bit below $3300 at $3288.62.

As we can see from the AMZN chart above, 3320 was an area of resistance from Thursday. Taking this level with my reading of the options chain, I expected 3320 to act as resistance on Friday and for AMZN to trade lower, which it did. Thus I gave myself some room and sold the 3330/3340 call spread. 100 contracts represent 10,000 shares. I sold the spread for 2.80 and covered half at 1.10, and let the rest expire at 0, meaning I had bought the spreads I sold for an average of around 40c. This represented a profit of $2.40 on each of the shares. $2.40 times 10,000 shares is $24,000. I love lotto Fridays and will continue with this strategy in AMZN until it stops working! Nothing lasts forever, and past performance is not a predictor of future results, so as always, I will focus on risk management.

Bottom Line

Studying Open Interest and understanding where the smart money is positioned is a huge part of my trading strategy. It gives me a chance to be more competitive and take bets with favorable risk/reward, especially leading into options expiration on a Friday.

This is because market makers can take this opportunity to pin stocks at prices favorable to them to earn the most premium from the options they have sold. Trading AMZN on Friday Lotto Options is fast becoming my favorite trading strategy, and I will continue making this trade until it stops working!