Best way to reduce theta burn???

[dmo]

Quote from xflat2186:

Actually in equity options the out of the money puts will trade with a higher IV and taking that one further the winger calls or puts will trade at a higher IV then the AT's

Sorry Xflat, my post was poorly worded and not very clear. Let me try again.

What I meant to say was that any of the following factors is associated with higher theta (but they are not necessarily associated with each other):

- Higher IV
- Less time remaining
- Being more at-the-money


Conversely, the following factors are associated with lower theta:

- Lower IV
- More time remaining
- Being more out-of-the-money (or more in-the-money for that matter)

 

[xflat2186]

No biggie

 

[short&naked]

Is there a way to sell a put while going long a call to get back the theta that burns away over time with the long call?

 

[Pa(b)st Prime]

Quote from short&naked:

Is there a way to sell a put while going long a call to get back the theta that burns away over time with the long call?

Sure. Just construct an otm synthetic. I do it all the time. But swapping long gamma risk for increased delta risk isn't always a panacea either....

 

[short&naked]

Quote from Pa(b)st Prime:

Sure. Just construct an otm synthetic. I do it all the time. But swapping long gamma risk for increased delta risk isn't always a panacea either....

The idea would indeed to replicate a futures position and create a money management system for short-term (days - week) trend following on the SPY.

Only 2% of equity would be dedicated to the option purchase (eliminating the need for a stop).

Assuming all of the above, what option risks would you recommend I hedge? Which risks would have to then be magnified?

 

[Pa(b)st Prime]

Atticus and a few other guys are like having Cottle here, so hopefully if I give you half-ass advice they'll quickly correct me.

Other than delta risk-and of course minute basis risk, i.e. if you pay way beyond fair value for the synthetic-there isn't much gamma consideration until one of the options becomes closer to being atm. Particularly close to expiration.
P.S. Yes I know if you're long a synthetic on an index plunge that the otm put iv will skyrocket but in that scenario your long deltas are going to be a far bigger worry than a temp spike in vol......

Quote from short&naked:

The idea would indeed to replicate a futures position and create a money management system for short-term (days - week) trend following on the SPY.

Only 2% of equity would be dedicated to the option purchase (eliminating the need for a stop).

Assuming all of the above, what option risks would you recommend I hedge? Which risks would have to then be magnified?

 

[short&naked]

Quote from Pa(b)st Prime:

Atticus and a few other guys are like having Cottle here, so hopefully if I give you half-ass advice they'll quickly correct me.

Other than delta risk-and of course minute basis risk, i.e. if you pay way beyond fair value for the synthetic-there isn't much gamma consideration until one of the options becomes closer to being atm. Particularly close to expiration.
P.S. Yes I know if you're long a synthetic on an index plunge that the otm put iv will skyrocket but in that scenario your long deltas are going to be a far bigger worry than a temp spike in vol......

Thanks for your post. I must admit that some of this is over my head (good options book anyone? )

 

[butterflykondor]

Natenberg/Hull

 

[atticus]

Quote from Pa(b)st Prime:

Atticus and a few other guys are like having Cottle here, so hopefully if I give you half-ass advice they'll quickly correct me.

Other than delta risk-and of course minute basis risk, i.e. if you pay way beyond fair value for the synthetic-there isn't much gamma consideration until one of the options becomes closer to being atm. Particularly close to expiration.
P.S. Yes I know if you're long a synthetic on an index plunge that the otm put iv will skyrocket but in that scenario your long deltas are going to be a far bigger worry than a temp spike in vol......

The synthetic does nothing to reduce risk; it's a method of trading calls from puts when you're forced into a position you don't want.

A narrow risk-reversal [split-strike] combo is as close as you can get to replicating a futures position and maintain greek risk beyond delta. A same-strike combo = synthetic futures.

Deltas increase as strikes converge in a split-strike or risk-reversal, eventually reaching 100 as you trade the same-strike combo. Deltas rise/fall with an increase/decrease in vol; synthetic strangle to straddle convergence.

 

[Pa(b)st Prime]

Let's say I sell 950 calls and buy 900 puts at even. (not doable right here, but as an example.)

Can you describe other than short deltas things I should know or look out for, greek wise? Thanks!

Quote from atticus:

The synthetic does nothing to reduce risk; it's a method of trading calls from puts when you're forced into a position you don't want.

A narrow risk-reversal [split-strike] combo is as close as you can get to replicating a futures position and maintain greek risk beyond delta. A same-strike combo = synthetic futures.