Spread get wider as option approaching expiration?
- Thread starter thecalip
- Start date
As the options go in the money the deltas increase and the more ITM they go the wider the difference between the long and short options become (even if both deltas approach 1.00, the premiums have to maintain a distance close to the strike difference although bid/ask spread cuts this a bit) and time value premium gets squeezed out of the spread the closer you are to expiration.
Verticals on the brain Phil
Was the OP refering to b/a spread?
To re-iterate and elaborate on Riskarb, mainly for my own benefit, the basic theory is that b/a spread widens as a reflection of the delta risk assumed by the market maker taking the opposite side of your trade.
The further ITM the option, the larger the delta (tends to 1) and hence the larger the delta risk and likely b/a spread.
It also follows that higher volatility also entails greater risk for the poor old market maker in the split second that she takes on the other side of your trade before conversion/reversal or other lock. Therefore, greater volatility manifests as larger b/a spread too.
The additional factor as you allude to is that as expiration approaches and gamma kurtosis really starts to take hold i.e. the gamma curve becomes peakier, this can be an additional risk factor that the market maker has to reflect in the b/a spread. The larger the gamma the greater the ability to manufacture those pesky deltas.
MoMoney.
Was the OP refering to b/a spread?
To re-iterate and elaborate on Riskarb, mainly for my own benefit, the basic theory is that b/a spread widens as a reflection of the delta risk assumed by the market maker taking the opposite side of your trade.
The further ITM the option, the larger the delta (tends to 1) and hence the larger the delta risk and likely b/a spread.
It also follows that higher volatility also entails greater risk for the poor old market maker in the split second that she takes on the other side of your trade before conversion/reversal or other lock. Therefore, greater volatility manifests as larger b/a spread too.
The additional factor as you allude to is that as expiration approaches and gamma kurtosis really starts to take hold i.e. the gamma curve becomes peakier, this can be an additional risk factor that the market maker has to reflect in the b/a spread. The larger the gamma the greater the ability to manufacture those pesky deltas.
MoMoney.
Quote from momoneythansens:
Verticals on the brain Phil
Was the OP refering to b/a spread?
To re-iterate and elaborate on Riskarb, mainly for my own benefit, the basic theory is that b/a spread widens as a reflection of the delta risk assumed by the market maker taking the opposite side of your trade.
The further ITM the option, the larger the delta (tends to 1) and hence the larger the delta risk and likely b/a spread.
It also follows that higher volatility also entails greater risk for the poor old market maker in the split second that she takes on the other side of your trade before conversion/reversal or other lock. Therefore, greater volatility manifests as larger b/a spread too.
The additional factor as you allude to is that as expiration approaches and gamma kurtosis really starts to take hold i.e. the gamma curve becomes peakier, this can be an additional risk factor that the market maker has to reflect in the b/a spread. The larger the gamma the greater the ability to manufacture those pesky deltas.
MoMoney.
at first glance I thought I'm reading erotica : "she takes on the other side " , "spread widens"...
Just kidding , Mo , very helpful post
LMAO. Yeah, I have that on the brain most of the time, and it finds a way to make it subliminally into my posts 
BTW, hope your short dispersion portfolio is surviving the small correction we've been having of late.
BTW, hope your short dispersion portfolio is surviving the small correction we've been having of late.
Quote from momoneythansens:
LMAO. Yeah, I have that on the brain most of the time, and it finds a way to make it subliminally into my posts
BTW, hope your short dispersion portfolio is surviving the small correction we've been having of late.
I actually making more money now. Couple of days ago I closed most of the big winners (components FOTM for 5-10 cents) and all original DIA puts (113 strike) and reopen 116 (then ATM) to hedge the five remaining ATM components.
This simulator, based on the Black-Scholes model, allows you to visualize how the option's value and greeks change function of various factors: strike, underlying's price, implied volatility, time to expiration, etc..
Very true, you will notice there will often be a negative time premium. I.e. if you will sell your in-the-money longs instead of exercising them, do some math and you will see you often are giving the guy on the other side an instant arbitrage oppty.