Time is on Your Side - SPX Calendars

[optionsmaven]

Atticus, I'm not "admonishing" the Greeks, many people find them useful tools. I don't, but that's just me. TV does not refer to "thoretical" value, but time value, that part of options premium that is OTM. The residual value of the two spreads is the combination of the MTM prices of all ITM options after the Friday settlement of the nearby contracts.

Good trading to all,

Josh

 

[optionsmaven]

Atticus, anent your last post, I'm NOT in a naked strangle with unlimited risk. That's why I'm long the out week strikes. DUH. The reason the strategy has good profit potential, notwithstanding the mathematical jargon, is because TV decays faster in the nearby option than in the out option. It's as simple as that.

Good trading to all,

Josh

 

[Eliot Hosewater]

Quote from traderlux:

need some help....mar4 mar5 weekly options...

i see a weekly option for mar4 (20110325)...

i dont see an option one week further out which would be a weekly for mar5?....i thought that didnt come out until thu mar 24...

tia

AFAIK most week there won't be anything expiring two weeks out. You have to go with the next monthly expiration, or quarterly if it's closer. This month the quarterly just happens to expire about a week after the Mar4.

I am having trouble understanding what Atticus means by selling the strange is unnecessary. Isn't it just the short legs of the two calendars? I don't see where there is an extra short strangle involved.

 

[Eliot Hosewater]

Quote from optionsmaven:

Atticus, anent your last post, I'm NOT in a naked strangle with unlimited risk. That's why I'm long the out week strikes. DUH. The reason the strategy has good profit potential, notwithstanding the mathematical jargon, is because TV decays faster in the nearby option than in the out option. It's as simple as that.

Good trading to all,

Josh

Hasn't that always been the reasoning behind calendars, diagonals, double diags, etc?

With weeklys you just get faster theta. As the Greek jockeys always like to mention more gamma exposure, too.

 

[atticus]

Quote from optionsmaven:

Atticus, anent your last post, I'm NOT in a naked strangle with unlimited risk. That's why I'm long the out week strikes. DUH. The reason the strategy has good profit potential, notwithstanding the mathematical jargon, is because TV decays faster in the nearby option than in the out option. It's as simple as that.

Good trading to all,

Josh

You lack the vernacular, so it's a bit confusing when you use the term short strangle to describe the position. The combination long calendars converge to a LONG STRANGLE at expiration, so you're 180-degrees off the mark when describing the position.

I had assumed you were selling the strangle and legging into the long calendar. I realize now that it's simply an error of terms. You somehow think it resembles a short strangle. In reality, the "decay" flips modality mid-week and becomes short "decay" if trading within one deviation.

The wins at the strikes are not the result of decay. It is a long strangle at expiration of the short contracts.

 

[optionsmaven]

Hey, atticus, I'm getting pretty tired of your snide remarks about my "vernacular", alleged "error in terms", and other attempted put downs. I've been trading options since before the CBOE was even created and as an upstairs trader after that. So, enough of your patronizing remarks. You sound to me like a dilettante who hasn't a clue about what REAL trading is all about. Unlike you, I know what I'm talking about and have made a career out of it. Can you say the same? In any event, I will no longer reply to your posts. You apparently have some kind of agenda that I am loath to participate in.

However, good trading to you.

Josh

 

[JJacksET4]

Quote from optionsmaven:

....Should the market stay near the current price level, there likely will be a small profit at the nearby expiry. However, any large move, up or down, will see the out week combination of longs having a large gain in value, as the nearby strikes expire worthless.....

Josh

Josh, just to point it out since you were looking for comments - assuming I am understanding your position correctly, I think there would be 2 main risks:

1. In a very large move, either the calls or puts for the short week and the longer week would go deep in the money and would just about cancel each other out, there fore costing nearly 100% of the debit. It might not be likely, but just to picture it, pretend SPX went to 1600 in your example. Both the short week and longer week calls would be nearly the same value (very little time value would remain for the longer week calls) and the puts on both sides would be worthless. So, you would get a small amount only of the original debit back. Again, I realize a move like that in 1 week might be rare, but if a person invested too much of their account into this trade, they could get almost wiped out in one really bad week.

2. I would assume/imagine that if the market IV was fairly high when you did this trade, but it fell during the week, the loss on the longer week from the IV drop could offset the gains or at least most of the gains from the short week options expiring.

3. I was wondering as well as another poster that brought it up - I don't trade weeklys so sorry if I should know this - are the next 2 weeks options always available? I think the weeklys are only made for 1 week in advance - so you would only be able to do this as normal options expiration was approaching and maybe the next week as well, right? Sorry again that I don't know much about the weeklys.

Thanks,

JJacksET4

 

[atticus]

Quote from optionsmaven:

Hey, atticus, I'm getting pretty tired of your snide remarks about my "vernacular", alleged "error in terms", and other attempted put downs. I've been trading options since before the CBOE was even created and as an upstairs trader after that. So, enough of your patronizing remarks. You sound to me like a dilettante who hasn't a clue about what REAL trading is all about. Unlike you, I know what I'm talking about and have made a career out of it. Can you say the same? In any event, I will no longer reply to your posts. You apparently have some kind of agenda that I am loath to participate in.

However, good trading to you.

Josh

Wow, because it really doesn't show. And FWIW, I've been trading personal and OPM funds for years. Hedge funds and POA. Our CVs aren't really relevant here.

I actually posted a long/short calendar, but corrected it later. I apologize for confusing anyone, but the terminology has nothing to do with greeks. You can infer the decay flip simply by looking at the position at expiration of the front position. It has to go short decay if delta neutral (or within 20 deltas).

I don't get the short strangle idea, at all. It loses atm, period. You're buying a discounted long strangle. Actually a nice method of getting long the outliers.

 

[optionsmaven]

Eliot, you're absolutely correct. Atticus is just confusing everybody. There is only one strangle involved and it's covered by the long options at the same strikes to create two calendars, one above and one below the current index level. And yes, the accelerated rate of decay of the nearby shorts is what creates the profit in calendar strategies.

Good trading to all.

Josh

 

[sle]

Quote from optionsmaven:

The reason the strategy has good profit potential, notwithstanding the mathematical jargon, is because TV decays faster in the nearby option than in the out option.

This is bullshit, as atticus pointed out.

(a) The only reason why this strategy (like any term structure trade) could have any profit potential is if you are locking in implied vol differential at good levels. It would be interesting to hear what parmeters you look at when evaluating these trades?

(b) When you are saying "but far strikes will save me", you do realize that by that time your account (assuming decent leverage) would be showing a substantial intrinsic loss. You kind-of hoping that far strikes will richen vol-wise and save you (gamma losses <= vega gains).

(c) I know you don't like math (and it kinda shows). However, it's important to realize that you are (a) selling realized volatility, (b) buying autocorrelation and (c) buying forward implied volatility. If you do not evaluate all three in some shape or form, you are an idiot and will blowup sooner or later.