0DTE-SPX Options vs. ES, MES

[antares66]

I didn´t want to start a thread which becomes personal between two members.
@MacBookProHo. I asked no question in regards to understand options and futures, i do. I only wanted to start a thread to get some opinions about this topic.
My understanding is this: When buying a Delta 50 option you participate in a dollar move of spx 50%. One dollar move*100*50% leads to a gain of $50. But if you are wrong and you will be down more than $ 50 because the spreads are mostly $30. But there will be also a change in volatilty. Buying a Delta 50 option is similar to ES which is $50 x S&P 500 Index.
The options are not linear like ES because the delta changes. If you are right your delta 50 option changes to delta 50+.
But could this math lead to smaller losses if your position runs against you? In case of a price drop (call option) the delta 50 option maybe becomes a delta 40 or 30 option. But you also have to watch time decay which leads to a problem if spx doesn´t move in your direction or if you buy the option in the last market hour.
At the moment my conclusion is that buying a delta 50 option on spx is quite so risky as buying a ES future contract.

 

[BlueWaterSailor]

My understanding is this: When buying a Delta 50 option you participate in a dollar move of spx 50%. One dollar move*100*50% leads to a gain of $50. But if you are wrong and you will be down more than $ 50 because the spreads are mostly $30.

Your understanding is... wildly incorrect. Delta defines the change in premium for a $1 move in the underlying in either direction. It does not mean "a gain of $50/loss >$50", and spread width has nothing to do with it. Market forces (supply and demand) define the price of an option, and by extension, relative gains and losses in it - and volatility is the variable we use to describe the level of that. In fact, if you think of volatility as the price of an option, you won't be far wrong: that's how professionals price them.

Here's a bit of CTM call data from the $SPXW.X option chain:

As a rule of thumb, you can estimate what the option will be worth for a given move by looking at strikes up and down the chain; accordingly, a 3975 call (50 delta/$46.30 right now) will be worth ~$43.90 after a 5-point down move. Your "$50 per dollar move" idea doesn't fit anywhere in this.

At the moment my conclusion is that buying a delta 50 option on spx is quite so risky as buying a ES future contract.

For you, it would be much riskier - because you don't understand even the basics of how options work. I would advise not risking your money until you've done quite a lot of reading, followed by a lot of paper trading to see how the price actually moves in practice.

 

[antares66]

@BlueWaterSailor
You are absolutely right i expressed myself wrong. A $1 move in the underlying at delta 50 lead to a gain of $0.50 in premium. But $0.50 x 100 (multiplier) lead to a gain of $ 50 in premium.
That fits with your calculation above for a 5 point move. But because of gamma also the delta changes, what is fine if the price is moving in your direction. I wanted to note that we need to account the gamma in the equation so options don´t move as linearly as futures.

 

[BlueWaterSailor]

@BlueWaterSailor
You are absolutely right i expressed myself wrong. A $1 move in the underlying at delta 50 lead to a gain of $0.50 in premium. But $0.50 x 100 (multiplier) lead to a gain of $ 50 in premium.

Well, this is why options premium and its changes are usually discussed at a per-share basis (so it would still be $0.50 rather than $50.) If you change the scale, yeah, it gets confusing. When people use the 100x multiplier, they're typically discussing (or boasting about ) their P&L, not option parameters.

That fits with your calculation above for a 5 point move. But because of gamma also the delta changes, what is fine if the price is moving in your direction. I wanted to note that we need to account the gamma in the equation so options don´t move as linearly as futures.

Gamma stays quite small until you're really close to expiration - e.g., for the ATM call strike in tomorrow's SPX expiration, it's still less than 0.01, and DgammaDspot ('speed') is basically zero - so it's not much of an influence in single calls.

Options don't move linearly, but they do so for reasons that are much more influential than gamma (at least before the last few hours.) E.g., for that same call, vega is 0.76 and theta is -11.06 - so volatility will affect the price almost 100x as much as gamma, and the passage of time will purely slam the hell out of it.

This is why buying 0DTE options doesn't make a whole lot of sense; the theta curve is damn near asymptotic at that point, and you're losing premium at nearly a linear rate (~10% of its total value in the first hour and accelerating from there.) Basically, you're standing in the middle of a burning house and praying for price movement to swoop in and drown everything to hell and gone. Not the most predictable outcome.

 

[antares66]

buying[/B] 0DTE options doesn't make a whole lot of sense; the theta curve is damn near asymptotic at that point, and you're losing premium at nearly a linear rate (~10% of its total value in the first hour and accelerating from there.) Basically, you're standing in the middle of a burning house and praying for price movement to swoop in and drown everything to hell and gone. Not the most predictable outcome.

You described the situation very well. Do you think it would be better to take an option which expired one or some days later when trading very short term? Premium would be higher, but time decay wouldn´t be so dramatic. I think you are mostly trading vertical spreads.
Is there a possibility to see the time decay on a hourly basis? What i understand is, that the informations about theta in tos or tws refer to day.

 

[BlueWaterSailor]

You described the situation very well. Do you think it would be better to take an option which expired one or some days later when trading very short term? Premium would be higher, but time decay wouldn´t be so dramatic. I think you are mostly trading vertical spreads.

No, I'm not mostly trading spreads - I was just explaining them (specifically, their risk-defined features) to @Overnight. I focus more on extracting alpha from vol... that may make me as deluded as he is, but I enjoy playing chess.

(Nobody told me it was going to be 16-dimensional chess with imaginary figures played on a board shaped like a Klein bottle, but what the hell - I'm adaptable...)

As to theta - here's a graph that you may find useful:

This is why, when you buy options, you want them to be as far out as possible in time - and you want to be out of that trade before you hit that 45-degree "knee". 60-120 DTE is quite common for entries.

Is there a possibility to see the time decay on a hourly basis? What i understand is, that the informations about theta in tos or tws refer to day.

Theta is marked per day everywhere; that's what the BSM and other models' calculations return. But figuring out the hourly is easy, at least before you get to 0DTE: since it's almost linear, simply divide it by the number of trading hours in a day (yes, theoretically it's for 24h, but all the vol - OK, excepting stochastic vol - happens during RTH.) Note the theta values on the SPY option chain (ATM +/- 2 strikes) from 21 to 0 DTE: a relatively slow change between 21 and 3, but now, with ~90 minutes to go, it's accelerated like a drunk with a hundred feet left to the liquor store.