Market forecast vs time decay

M

MathAndLogic

I am trying to get some discussion on how to maximize or minimize the effect of time decay when you have accurate market forecast. It is best to illustrate with an example.

If XYZ is trading at $100, and you forecast that it will TOUCH $105 or $95 within 4 weeks, but you are not sure when it will do so during the next 4 weeks, and you short a butterfly or buy a strangle. if XYZ touches $105 or $95 one minute before expiration, your short fly may be profitable but strangle may not be; on the other hand, if XYZ touches $105 or $95 one minute after you opened the trade, your short fly may still have a paper loss and the strangle a paper profit.

The question is, what can you do to best benefit from your market forecast and reduce the adverse effects of having or not having time decay?

Thanks.
 
I'll take a stab at it. Buy a 100 put/call straddle with expirations 60-90 days away. This pretty much eliminates the time decay. Now, I would do the following: If the underlying, touches 105, then sell the underlying. You have locked in your profit on that side. If the underlying returns to 100, buy it back. If this trade is profitable at this point, consider exiting everything. It works the other way as well (buy the underlying if it touches 95 and sell it when it returns to 100). Now the aggressive approach. Keep doing this until there are 30 days left until expiration--that is when time decay really kicks in. This works even better going from a low volatility environment to a higher one.
 
Quote from jwcapital:

I'll take a stab at it. Buy a 100 put/call straddle with expirations 60-90 days away. This pretty much eliminates the time decay. Now, I would do the following: If the underlying, touches 105, then sell the underlying. You have locked in your profit on that side. If the underlying returns to 100, buy it back. If this trade is profitable at this point, consider exiting everything. It works the other way as well (buy the underlying if it touches 95 and sell it when it returns to 100). Now the aggressive approach. Keep doing this until there are 30 days left until expiration--that is when time decay really kicks in. This works even better going from a low volatility environment to a higher one.
More...

Or in two words: gamma scalping :)
 
Quote from MathAndLogic:

I am trying to get some discussion on how to maximize or minimize the effect of time decay when you have accurate market forecast. It is best to illustrate with an example.

If XYZ is trading at $100, and you forecast that it will TOUCH $105 or $95 within 4 weeks, but you are not sure when it will do so during the next 4 weeks, and you short a butterfly or buy a strangle. if XYZ touches $105 or $95 one minute before expiration, your short fly may be profitable but strangle may not be; on the other hand, if XYZ touches $105 or $95 one minute after you opened the trade, your short fly may still have a paper loss and the strangle a paper profit.

The question is, what can you do to best benefit from your market forecast and reduce the adverse effects of having or not having time decay?

Thanks.
More...

Try calendar spread. Close on strike-touch.
 
Quote from MathAndLogic:

The question is, what can you do to best benefit from your market forecast and reduce the adverse effects of having or not having time decay?
More...
Make a better forecast :)
 
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