A strategy to limit the cost of time value

[jamesbp]

Play around with the trade and post the graph.

Personally, FWIW, I think there are better / simpler trade structures than the ZEBRA that achieve similar pay=offs ... without giving it too much thought

Generically, the ZEBRA might look like

... and when compared with simple Put Vertical Spread with similar max-loss / zero-extrinsic looks like

Plenty of other conventional trade structures that replicate ZEBRA pay-off if you think through

 

[stevenpaul]

Personally, FWIW, I think there are better / simpler trade structures than the ZEBRA that achieve similar pay=offs ... without giving it too much thought

Generically, the ZEBRA might look like

View attachment 268660

... and when compared with simple Put Vertical Spread with similar max-loss / zero-extrinsic looks like

View attachment 268661

Plenty of other conventional trade structures that replicate ZEBRA pay-off if you think through

Thank you. I’m just wondering though, doesn’t the put vertical have capped payoff, whereas this so-called zebra formation has an unlimited payoff.

I think the OP wants a short stock substitute without having to pay out the time premium on a long put. A bear debit spread certainly reduces cost compared to puts outright, but theta is negative, while the is positive of theta.

 

[jamesbp]

Thank you. I’m just wondering though, doesn’t the put vertical have capped payoff, whereas this so-called zebra formation has an unlimited payoff.

I think the OP wants a short stock substitute without having to pay out the time premium on a long put. A bear debit spread certainly reduces cost compared to puts outright, but theta is negative, while the is positive of theta.

You can structure ATM/ITM verticals with positive theta initially if that is what you are aiming to do ... just eyeball the RiskGraph in previous post ... the Vertical has more +Theta than the Zebra ...

I generally prefer to trade Vertical put spreads -v- Outright long puts ... but again ... if you want to structure so that position is nett long puts ... possibly simpler / better trades than the ZEBRA are

... Buy further ITM puts

... buy ITM Straddle

 

[the learner]

Thank you @jamesbp for these alternatives but the straddle has time values to be paid so it is not exactly comparable to the strategy in the article, is it?
Also, as @stevenpaul said, thestrategy they are talking about is uncapped so that would really only be comparable to strategies having at least one uncapped leg.
Clearly to limit (or eliminate) time value we need to sell something to compensate the part we buy but I cannot really think of alternatives with unlimited profit potential and limited risk as the strategy being discussed in the article.

For those who have also followed the TastyTrade discussion, can I know what are the critics made to the strategy and what alternatives with similar characteristics where proposed instead?

 

[jamesbp]

Thank you @jamesbp for these alternatives but the straddle has time values to be paid so it is not exactly comparable to the strategy in the article, is it?
Also, as @stevenpaul said, thestrategy they are talking about is uncapped so that would really only be comparable to strategies having at least one uncapped leg.
Clearly to limit (or eliminate) time value we need to sell something to compensate the part we buy but I cannot really think of alternatives with unlimited profit potential and limited risk as the strategy being discussed in the article.

For those who have also followed the TastyTrade discussion, can I know what are the critics made to the strategy and what alternatives with similar characteristics where proposed instead?

I suspect that your 'focus' purely on theta is not necessarily helpful in developing alternative strategies that are nett long puts ... assume the market rallies a little ... the ZEBRA quickly has more negative theta ( along with some pretty unhelpful vega ) ... than the alternatives I suggested ...

Rather than get overly focussed on any particular trade structure, suggest that you think about the trade in terms of

... Core Position ... Buying at ATM Put ( Short Delta / Positive Vega / Negative Theta )
... Financing ... Sell Outrights / Verticals / Flies ( Positive Theta + other Greeks)

Such that
... Long ATM Put + Sell OTM Call = Short Risk Reversal
... Long ATM Put + Sell OTM Call Vertical = Long ITM Put
... Long ATM Put + Sell OTM Call Vertical x2 = Long ZEBRA
... Long ATM Put + Sell OTM Call Fly = Long 1x2 Put Ratio

I have used Calls to describe the 'Financing' trade which gives you the 'positive' theta to offset the 'negative' theta of buying the ATM put

Hopefully, you will find this approach useful ...

 

[the learner]

Thank you, @jamesbp it is useful to see the strategy as core + financing. Btw, I have found interesting the strategy of the article because I have always found very frustrating when market doesn't move and you see your position losing money because of the time value. Having positive gamma and positive/negative delta in case of call/put without having to care much if market doesn't move because you haven't paid any time value it is helpful.
But I guess the same can be done on vertical spreads, by finding the 2 options that have roughly the same time value so that they offset each other.

 

[MoneyMagnet]

I'm with jamesbp. This trade seems designed to reduce theta loss at the expense of delta gain. I'd rather go further in the money, which reduces theta loss yet increases delta gain. The downside, of course, is paying a higher premium.

 

[the learner]

I'm with jamesbp. This trade seems designed to reduce theta loss at the expense of delta gain. I'd rather go further in the money, which reduces theta loss yet increases delta gain. The downside, of course, is paying a higher premium.

Hi, sorry why you say that the strategy reduces theta losses at the expense of delta gains? Tha article actually shows the comparison between the strategy and a simple PUT ITM. They both have delta 80 (see the first strategy comparison here https://tradingmatex.com/options-as-stock-replacement/)