for calendars you want to buy OTM option at a strike and sell near term option at the same strike. so the best scenerio is for the stock to hit your strike and booked the differences in the premium of the option. If it never hit your strike but trade in a range you can continue to capture the near term premium until about 3 month from the longer OTM opex, at this time you will probably want to get rid of the position because of decay will be fast.
Best options strategy to avoid time decay?
- Thread starter yalag
- Start date
Just go naked short the straddle my friend, AAPL will not go further up, its overbought...trust me, I manage $200M on a daily basis.
But in all seriousness, Im pretty new at this so you probably shouldn't listen to me, but I would think there's some kind of strategies where you can profit of theta whilst being bullish underlying...maybe the pros on here have some suggestion. But as said, Im probably wrong
I tend to think of how to protect myself first, so I would probably buy a long term vertical and leverage based on how much account risk.
Let's say you think AAPL will be up by 25% by 2014 and you are willing to risk 10% of your cash.
You could buy a 685 Call for $78.40 and sell a 740 Call for $60 (2014 expiration on both). This means for each vertical, you risk $18.40 per contract. Your max reward would be $5500 per contract.
To meet the $10k max risk, you buy 5 contracts.
If things end up beyond 740, you pocket $27500, which is a 27% return on your account.
If things end up below 685, all options expire worthless and you are down 10% max.
Options give you the ability to tailor a risk graph to your liking. In general, to get something, you have to give up something -> trade offs.. So if you want to negate time decay, you have to sell some premium but more often than not, that 2nd leg may become a drag on your net.
The problem with your test question is that it's ill defined. The best option strategy involves timing, direction magnitude of expected (hoped for) move and risk tolerance if wrong. If you define those better, you might find a select a more acceptable risk profile. In lieu of that, some strategies mentioned (mine and from others) will do well, some OK and some will be ungahts (g).Quote from yalag:
I understand that there is no free lunch. Sorry for the lack of reply but I was away for a couple of days. Here are my options it seems (suppose I have 100k to invest) for 1 year bull AAPL.
Sounds like an interesting homework assignment
(1) DITM calls 2013. For example, Jan 2013 300 calls are going for 306.00. This would have very little time decay and it's slightly better than just the stock because I can double the acquisition.
Correct, very low time decay but with the Holland Tunnel wide B/A spreads, you need a move in the UL equal to that spread in order to break even. No big deal if you're a buy and hold investor who's bullish and in it for the long haul. Different story for a trader.
(2) Calendar spread. So I can purchase Jan 2013 600 for 71.04 and write April 2012 670 for 3.75. I suppose this has more of a time decay than (1) but I'm gaining it back over time if all my writes expire each month?
Tho it's a calendar, most people call this a diagonal since the strikes are different. The convention is that calendars have the same strike.
Selling the 670c won't negate the time decay since the 600c is mostly time premium. If AAPL moves up sharply right away, you'll have a much lower gain than you might think. With a delta of 50+, at 670, the 600 call will be up only 40+ pts and the 670c could take back 15-20 pts. At 670 at Apr expiry, you might net only 40 pts for a 70 pt move (less if AAPL move past 670 because somewhere up there, the 670c's delta will exceed that of the 600c). Certainly a great trade for a month but far short of what you would have gotten for owning either the UL or the deep ITM call (your bullish intention). Those pesky trade offs
(3) Margin account. I can just open a margin account with the 100k and essentially double the acquisition anyway with no time decay?
In lieu of higher margin req'd for the UL, consider a synthetic stock position. Buy a call and fund it by selling the same strike put. Buy all the synthetics that your 100k will allow and either win the trading contest or blow out and join a new one
(4) Write OTM puts 2013? So I suppose I can write Jan 2013 400, and with 100k cash I can only write 250 @ 9.90 each which = $2500. So if by then the stock is above 400 I pocket $2500. I don't think this is capturing my bull intention very well?
Selling deep OTM puts is the cautious man's way of making a smaller, nice proift with much less risk on the table (ignoring the unlikely dirty bomb scenario).
So I'm very confused, why should I bother with all this options play when the margin account provides roughly the same amount of leverage and less to manage?
always buy DOTM call.
the best way to avoid time decay is buy DOTM call, or simply day trade it, this minute in and that minute out. I made money on 650, 620 calls!
AAPL 800 2014 call is at 47
900 2014 call is at 30
even DOTM are so expensive, only idiots will buy them.
or you need short a call to reduce premium, and time delay. but when you short a call, you need a margin, that only avoid kind of time decay, you still pay too much.
47/30 correspond to a decent invidual stock price, why not just do some research, simply buy a stock (no time decay), also you can hold it infinitely.
you are seeking a losing strategy in option
the best way to avoid time decay is buy DOTM call, or simply day trade it, this minute in and that minute out. I made money on 650, 620 calls!
AAPL 800 2014 call is at 47
900 2014 call is at 30
even DOTM are so expensive, only idiots will buy them.
or you need short a call to reduce premium, and time delay. but when you short a call, you need a margin, that only avoid kind of time decay, you still pay too much.
47/30 correspond to a decent invidual stock price, why not just do some research, simply buy a stock (no time decay), also you can hold it infinitely.
you are seeking a losing strategy in option