Turbo charging theta

E

eaglefeather

Hello,

Was wondering if anyone sells leaps and/or longer dated credit spreads to enhance theta decay of short term positions.

This assuming you hedge some delta and vega while doing so.
 
This doesn't make sense.

Shorting LEAPS which have no theta and are essentially delta and vega vehicles.

So you're (locally) neutral delta. What exactly do you believe you are enhancing here?
 
Well LEAPS maybe a poor example, but another month or three out, there is theta. Combine that with a near term spread or calendar with more theta. Configured correctly it seems you can be ultra short theta, dangerously short vega, and delta neutral.
The reason I started this thread is because I have tried many strategies to scalp time decay, but have come to realize that ultimately it seems that one has to be correct on direction.
I do have a covered call with a hedge strategy that does make money, but I was incorrect in my assumptions that I was scalping theta. Covered calls are far from that since ultimately the delta of the underlying stock is the key to the whole strategy.
Another strategy I've been looking at lately is gamma scalping as it is referred to.
But back to the point.
It seems that you can hedge your near term position by using greeks of an offsetting position further out.
Also the short calendar spread seems to be a useful hedge against short term spreads.
 
you cant earn theta unless you are an insurance company because its very very dangerous. you need to buy lots of insurance and pay premiums.
 
if you sell at the money 1 week vix puts that is probably the most dangerous since its like vol of vol or vol squared which is worse than vol because its squared.
 
best way if you want to earn theta: buy an inverse 2x leveraged etf on the daily return of a basket of vix futures. works in other places too.
 
every short option got +theta.. it increases ATM and decreases OTM/ITM, increases with less DTE and decreases with more DTE.

Considering this, the highest decay would be an ATM option about to expire. An ITM/OTM LEAP would have the least decay, so totally the opposite of what you are looking for.

On top of this, the decay accelerates in the period between 40 and 20 DTE, so a short straddle or a narrow short strangle within this time frame could be a reasonable source of +theta.

The problem is that this is a naked short position, you get massive gamma/vega risk. Could work in the period after a price shock, when you profit from time decay, volatility contraction and a consolidation/accumulation pattern in the underlying.

You must be sure however that the event that triggered the spike is a "one-off" mean reverting event where after the initial shock it's business as usual. (For instance, some industrial incident happening, News that turn out to be fake, some CEO tweeting nonsense etc.). In case of an unfolding situation that involves a paradigm shift (FED decision, etc.) I would be much more careful.
 
Baozi said:
You must be sure however that the event that triggered the spike is a "one-off" mean reverting event where after the initial shock it's business as usual. (For instance, some industrial incident happening, News that turn out to be fake, some CEO tweeting nonsense etc.). In case of an unfolding situation that involves a paradigm shift (FED decision, etc.) I would be much more careful.
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The problem is that if you are "sure" it's a one-off, the market most likely knows it too and already reflects it in lower levels of IV. I do agree however that this process is not instantaneous and there is some profit to be made as the repricing of IV is in process after a (kind of) binary event.

Baozi said:
On top of this, the decay accelerates in the period between 40 and 20 DTE, so a short straddle or a narrow short strangle within this time frame could be a reasonable source of +theta.
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I have found that for OTM options, the decay occurs in a more linear manner with a bit of acceleration towards the end (final 2-3 weeks). This acceleration is much more pronounced the closer you are to ATM, but I would say max acceleration occurs in the last few days (or hours) not in the 40-20 DTE period.
 
eaglefeather said:
...The reason I started this thread is because I have tried many strategies to scalp time decay, but have come to realize that ultimately it seems that one has to be correct on direction....
More...
First, can you be more clear about what you mean by scalping time decay? Scalping is usually used in a different context than this type of discussion. Do you mean, "take advantage of time decay?"
 
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