Greek Theta problem

[abc12345]

Hello,

For several times I am experimenting with ES options model which represent an Iron condor. The model has duration 1 day and the greeks are around: theta=130, vega=-10, delta=-0.5

I like the model because vega is small and this escape me from the volatility.

I noticed that the model gives average profit around $20 per hour if it stays at the range.

Today I did the same ES model but for 5 hours it gives nothing (the volatility was almost the same).

I think the problem is not in the IV sensitivity because I do the same model every time.

Maybe the behavior of Friday options theta decay is different from the other days?

Does anybody have seen the same problem or have done some investigation for the theta decay that can explain my problem?

 

[newwurldmn]

Theta isn’t linear throughout the day.

and it is susceptible by bid offer issues.

 

[MrMuppet]

a one day iron condor?? are you serious?

You can throw the entire Black Scholes model out of the window. These options are more or less a digital bet on strike touch.

 

[Baozi]

I don't think that market makers continuously adjust for everything all the time... Probably intraday they adjust almost instantly to spot movements, quite regularly to volatility changes, and maybe just once in a while to time decay.

Disclaimer:
This comes from my observation of option price changes, I'm not a MM so I could be wrong

 

[MrMuppet]

Flow traders ajdust their deltas about every 30ms

 

[Baozi]

Flow traders ajdust their deltas about every 30ms

oh wow, it's actually much less frequent than I imagined..

 

[LM3886]

a one day iron condor?? are you serious?

You can throw the entire Black Scholes model out of the window. These options are more or less a digital bet on strike touch.

MrMuppet, could you please explain in a bit more detail why BS model is invalid for this case? I thought people could bet on strike touch with multi-day options as well. Thanks!

 

[MrMuppet]

MrMuppet, could you please explain in a bit more detail why BS model is invalid for this case? I thought people could bet on strike touch with multi-day options as well. Thanks!

The BS - model is calculated with daily granularity in mind, so unless you recalibrate it to intraday data, you won't get much out of it.

Daily options are a pure gamma play, because they don't have much optionality left. If an option is worth 5$ now but 0.5% up it's worth 500$ and 0.5% down it's worth zero, you're not betting on the distribution of log normal returns of the day but almost exclusively on the idea that the option is trading in/out of the money.

So if you're stupid enough to trade iron condors with daily options, your wing hedges won't do anything for you when your short legs are trading ITM.
You usually buy back all your short strikes and leave the long strikes open when you trade a multi expiration/multi strike options portfolio. The short strikes don't give you any premium, but the long strikes could give you a fat gamma profit in case an outlier move happens

 

[ffs1001]

Daily options are a pure gamma play,

Are they not also a vega and theta play to some degree? Say you sell a credit spread on the SPX where the short is at 10 delta, for example, and assume that the index stays largely static, then by the end of the day, that spread will be worth zero.

So if you're stupid enough to trade iron condors with daily options, your wing hedges won't do anything for you when your short legs are trading ITM.

The longs are there to limit the loss (and margin considerations). There is a growing band of 0DTE traders. I even joined a subscription service last year to learn to do these 0DTE IC's (yes, I know, what was I thinking) and I gave up after a couple of months - the stress levels when the market approaches one of your shorts was too great for me. Psychologically, it wasn't for me. But that doesn't mean that the strategy doesn't work. Or that it's stupid. It's just that *I* couldn't make it work. And, in the interests of fairness, and objectivity, the guy running the show has a great success rate. This year, out of about a 100 trades, he only had 4 losers (and none of them were max loss).

The key lies in :
(1) entering at the right time (depending on support/resistance levels) during the day. Sometimes he wouldn't open a trade till about 3 hours before the market close. And then get out before the power hour.
(2) knowing when and how to adjust when the trade starts showing a loss.

 

[MrMuppet]

Are they not also a vega and theta play to some degree? Say you sell a credit spread on the SPX where the short is at 10 delta, for example, and assume that the index stays largely static, then by the end of the day, that spread will be worth zero.



The longs are there to limit the loss (and margin considerations). There is a growing band of 0DTE traders. I even joined a subscription service last year to learn to do these 0DTE IC's (yes, I know, what was I thinking) and I gave up after a couple of months - the stress levels when the market approaches one of your shorts was too great for me. Psychologically, it wasn't for me. But that doesn't mean that the strategy doesn't work. Or that it's stupid. It's just that *I* couldn't make it work. And, in the interests of fairness, and objectivity, the guy running the show has a great success rate. This year, out of about a 100 trades, he only had 4 losers (and none of them were max loss).

The key lies in :
(1) entering at the right time (depending on support/resistance levels) during the day. Sometimes he wouldn't open a trade till about 3 hours before the market close. And then get out before the power hour.
(2) knowing when and how to adjust when the trade starts showing a loss.

Everything you just described is just a bet on strike touch (or no strike touch) aka. " I bet that the index does not touch my short strike"

Nothing here is a vega or theta/gamma play. And no, your longs won't limit the loss. Unless you're thinking about a nuke against your position, you're basically just short the strike with a negative expected value (since your "protective" long sits so high on the IV skew)