larry, if you use deep in the money leaps volatility hurts very little if at all. for example the 80 dec 12 leap for spy has only 1.5% time value the rest is intrinsic value not affected by volatility. also, since i use leaps and i roll them out with 12 months to expiration even if volatility decreases and the leaps decrease slightly in value that means i buy the new ones at a lower price also. but with little time value there is little effect from vega. drjoe
--- In ConservativeOptionS
>
> Actually, theta is pretty predictable. What you really need to be aware of and probably an explanation of your varied results is something far more volalite and hurtful.  Volatility is will impact the longer term options. This can of course be good it if goes up from where you are or hurtful if it goes down from where you got in. This greeks can inject and extract value far more quickly.  Check your volatity before you get in.
>
>
>
>
> ____________
> From: Larry Grimes <larry.grimes@
> To: ConservativeOptionS
> Sent: Sun, April 11, 2010 11:41:47 AM
> Subject: RE: [ConservativeOption
>
> Â
> [Attachment(
> Jocelyn,
>
> I hope I'm not going to confuse the issue even further, but here's something
> to I came across while following the thread on your synthetic positions. I
> also have been experimenting with this strategy with mixed results. Your
> long call delta is approximately 3 standard deviations ITM (thus the .8 to
> .9 delta) - I'm with you here. Then we deal with Theta - here is an
> explanation that I found:
>
> Options Theta - Definition
> Options Theta measures the daily rate of depreciation of a stock option's
> price with the underlying stock remaining stagnant.
>
> Options Theta - Introduction
> In layman terms, Theta is that options Greek which tells you how much an
> option's price will diminish over time, which is the rate of time decay of
> stock options. Time decay is well known in options trading
> <http://www.optiontr adingpedia. com/options_ trading_basics. htm> where the
> value of the option diminishes over time even though the underlying stock
> remains stagnant. Time decay occurs because the extrinsic value
> <http://www.optiontr adingpedia. com/extrinsic_ value.htm> , which is also
> known as the Time Value, of options diminishes as expiration
> <http://www.optiontr adingpedia. com/options_ expiration. htm> draws nearer. By
> expiration, options would have completely no extrinsic value and all Out Of
> The Money (OTM) Options
> <http://www.optiontr adingpedia. com/out_of_ the_money_ options.htm> would
> expire worthless. The rate of this daily decay all the way up to its
> expiration is estimated by the Options Theta value. Understanding Options
> Theta is extremely important for the application of options strategies
> <http://www.optiontr adingpedia. com/free_ option_strategie s.htm> that seeks
> to profit from time decay.
>
> Options Theta - Characteristics
>
> Positive & Negative Options Theta Values
> Options Theta values are either positive or negative. All long stock options
> positions have negative Theta values, which indicates that they lose value
> as expiration draws nearer. All short stock options positions have positive
> Theta values, which indicates that the position is gaining value as
> expiration draws nearer.
>
> Options Theta & Options Moneyness
> Options Theta value is highest for At The Money (ATM) options
> <http://www.optiontr adingpedia. com/at_the_ money_options. htm> and
> progressively lower for In The Money (ITM)
> <http://www.optiontr adingpedia. com/in_the_ money_options. htm> and Out Of The
> Money (OTM) as ITM and OTM options have much lower extrinsic values, giving
> little left to decay. Learn all about Options Moneyness
> <http://www.optiontr adingpedia. com/options_ moneyness. htm> .
>
> Different For Call & Put Options
> At the money call and put options sharing the same strike price and
> expiration date has different theta values. Unlike delta
> <http://www.optiontr adingpedia. com/options_ delta.htm> where it is the same
> 0.5 for both at the money call and put options, Option Theta varies
> according to the cost of carry of the underlying stock.
>
> Options Theta - Who Should Be Concerned?
> Options Theta is an extremely important measurement for the execution of
> Theta based neutral options strategies
> <http://www.optiontr adingpedia. com/neutral_ options_strategi es.htm> that aim
> to profit from the decay of extrinsic value or Time Decay. Such options
> trading strategies include the well known Calendar Call Spread
> <http://www.optiontr adingpedia. com/free_ calendar_ call_spread. htm> and all
> its variants. Options traders utilizing such options trading strategies must
> make sure that the aggregate theta values of those positions are positive in
> order to turn a profit.
>
> Options traders speculating a moderate, short term move in the underlying
> stock must make sure that options or options positions are bought with as
> low a negative options theta as possible so that time decay do not
> completely offset the profits on those small or moderate moves.
>
> Conversely, Options Theta is a lot lesser of a concern for anyone utilizing
> directional options trading strategies such as Bull Call Spreads
> <http://www.optiontr adingpedia. com/free_ bull_call_ spread.htm> where a
> position is held all the way to expiration. In this case, Options Delta and
> Gamma <http://www.optiontr adingpedia. com/options_ gamma.htm> would take
> center stage instead. These kinds of options traders simply take the entire
> extrinsic value as an expense and build it into the calculation for
> breakeven point, therefore, how fast that extrinsic value erodes away
> becomes of secondary concern.
>
> Options Theta - An Indication Of Time Decay
> Options Theta measures exactly how much money an option will lose with the
> underlying stock remaining stagnant on a daily basis. An option contract
> with Options Theta of -0.012 will lose $0.012 every day even on weekends and
> market holidays. This is why options traders utilizing neutral options
> trading strategies
> <http://www.optiontr adingpedia. com/options_ strategy_ library.htm> love to
> put on these positions ahead of long weekends where they get 3 safe and free
> days of decay profits. Conversely, this works against the trader who bought
> those stock options. If those options contract has options theta of -0.012
> and a price of $1.40, the holder will come back after a 3 days long weekend
> to find the price of those options at $1.36 instead.
>
> Time decay always works against buyers and benefits writers
> <http://www.optiontr adingpedia. com/glossary. htm> of options. This is
> because both long call and long put options produces negative Options Theta.
> Negative options Theta diminish the price of the options and consequently
> the value of the position. Many options trading strategies sell out of the
> money options on top of buying at the money or in the money options in order
> to partially offset the negative theta, resulting in a lower rate of time
> decay. An example of such an options trading strategy is Bull Call Spread
> <http://www.optiontr adingpedia. com/free_ bull_call_ spread.htm> .
>
> Options theta does not remain stagnant as well. Options theta increases as
> expiration draws nearer and decreases as the options go more and more ITM or
> OTM. In fact, the effects of options Theta decay is most pronounced during
> the final 30 days to expiration where Theta really soars. That is why
> options traders usually avoid trading options with less than 30 days left to
> expiration.
> Type Theta value Effect Of Time Decay...
> Long Call Option Negative Negative
> Short Call Option Positive Positive
> Long Put Option Negative Negative
> Short Put Option Positive Positive
>
> Options Theta - Relationship with Options Gamma
> Options Theta is directly proportional to options gamma
> <http://www.optiontr adingpedia. com/options_ gamma.htm> . The higher the
> Gamma, the higher the Theta. High risk = high gains. High options gamma
> results in exponentially higher profits when the stock moves strongly but
> comes also with higher theta which decays the price of the option much
> faster. If that anticipated big move does not happen quickly, the option
> could lose a lot of money. Therefore, when one chooses such an aggressive
> option position, one must also take into consideration the higher risk
> involved due to higher Options Theta. Such balancing of potential risks over
> potential reward is actually prevalent in every aspect of options trading.
> There is never a free lunch.
>
> Factors Affecting Options Theta
> Two main factors influence the value of options Theta; Time to expiration
> and Options Moneyness. In general, Options Theta decreases as options go
> more and more in the money (ITM) / out of the money (OTM) and is highest
> when at the money (ATM). Options Theta also increases as expiration
> approaches.
>
> Knowing that nearer term at the money stock options have higher Theta values
> than longer term options of the same strike price allows you to choose the
> correct option in order to optimize profits for your expected holding
> period. If you expect the stock to move but not anytime soon, you should buy
> options that is as far from expiration as reasonable so as to reduce the
> effects of time decay.
>
> Calculating Aggregate Options Theta
> When you have a portfolio with many different stock options
> <http://www.optiontr adingpedia. com/stock_ options.htm> positions on a single
> stock, it is useful to know how much your overall portfolio is affected by
> time decay. You do this by aggregating the total options Theta in your
> portfolio. When aggregate options theta is negative, you know that your
> portfolio depends on the market moving very quickly in your favor in order
> to return a profit and when aggregate options theta is positive, you know
> that your portfolio will do well if the market remains relatively stagnant.
>
> Calculating aggregate options Theta is very simple. You simply list out all
> the Theta values in your portfolio and sum them together.
>
> Sample Options Trading Portfolio 1
> Option Position Theta
> 2 contracts of XYZ $25Call -2.4
> 10 contracts of XYZ $60Put 1
> Aggregate Options Theta -1.4
>
> In Sample Options Trading Portfolio 1, the portfolio would profit if XYZ
> shares move strongly because it has an aggregate options Theta of -1.4,
> which is a negative value. You will need to also calculate the aggregate
> options delta in order to know which direction of move is needed to produce
> a profit.
>
> I hope this is of some value. I have found that I also tend to "leg-in" to
> these positions and almost always close early, if profitable. Now, if the
> stock turns on you - the real work begins or you take your lumps, if it was
> easy, everybody would be doing it!
>
> Larry
>
> From: ConservativeOptionS trategies@ yahoogroups. com
> [mailto:Conservativ
> Palmer
> Sent: Saturday, April 10, 2010 8:02 AM
> To: ConservativeOptionS trategies@ yahoogroups. com
> Subject: Re: [ConservativeOption Strategies] Re: Diagonials
>
> Joe,
>
> Yes, I am selling shorts and buying longs on a one to one basis. However, I
> am not using leaps. I use buy long calls 6 to 8 months out.
>
> Jocelyn
>
> --- On Sat, 4/10/10, joe & leigh <gass20@...> wrote:
>
> From: joe & leigh <gass20@...>
> Subject: [ConservativeOption Strategies] Re: Diagonials
> To: ConservativeOptionS trategies@ yahoogroups. com
> Date: Saturday, April 10, 2010, 2:01 PM
>
> jocelyn
>
> are you selling short calls against long calls on a one to one basis? if you
> are once your short calls go in the money your leaps at delta of 0.8-0.9 can
> appreciate as much as your short calls and rolling is extremely important. i
> do have a paper in the file section describing how i trade diagonals...
> .drjoe
>
> --- In ConservativeOptionS trategies@ yahoogroups. com
> <http://us.mc454. mail.yahoo. com/mc/compose? to=ConservativeO ptionStrategies% 4
> 0yahoogroups. com> , Jocelyn Palmer <jocelyn.palmer@ ...> wrote:
> >
> > David,
> > Â
> > Thank you for that thoughtful reply. As we all know, webboard
> communications don't necessarily lead to civil discourse or complete
> understanding.Â
> > Â
> > I am in an options mentoring course currently and this diagonal strategy
> is presented as an alternative to covered calls. Long call + short call =
> synthetic covered call. It is a bullish directional strategy. It has
> also been called a fig leaf. In my case, it is not done with a long leap
> call, but rather a long call about six months out with a delta of .80 -
> .90. The short call is sold during the current month and traded out of the
> money. It is rolled up, down or forward and closed as necessary.
> > Â
> > I think that the reason the term synthetic was used to describe this
> strategy was because it is a substitute for a covered call strategy without
> the stock. This is a broad description rather than an exact definition.Â
> That is the distinction. To an academic, to use this term in this way is
> like listening to fingernails on a chalkboard.
> > Â
> > The strategy itself is sound. It is a long term monthly income strategy
> that is bullish in its direction and designed to harvest theta decay. I
> have had some success in this current market with the strategy. Initially
> I did not understand the importance of entry timing. Luckily the market
> has proven forgiving while I learn. I thought I would be making most of my
> money on rolling the short. Actually, most of my gains seem to have come
> from appreciation of the long. Thus, rolling the short is less important
> than I initially thought. Rather than rolling the short, I find myself
> closing out the entire position for a profit. Skews and arbitrage are not
> elements that enter into this particular strategy.
> > Â
> > I suspect that there are as many permutations of this strategy as there
> are people trading it. That is why it is so hard to define.
> > Â
> > Jocelyn
> > Â
> > Â
> > Â
> > Â Â Â Â Â Â Â
> >
> > --- On Sat, 4/10/10, David <david135@ .> wrote:
> >
> >
> > From: David <david135@ .>
> > Subject: Re: [ConservativeOption Strategies] Diagonials
> > To: ConservativeOptionS trategies@ yahoogroups. com
> <http://us.mc454. mail.yahoo. com/mc/compose? to=ConservativeO ptionStrategies% 4
> 0yahoogroups. com>
> > Date: Saturday, April 10, 2010, 6:58 AM
> >
> >
> > Â
> >
> >
> >
> > Hi Jocelyn,
> >
> > I would never call anyone stupid for not understanding synthetics. I
> > traded options for more than 10 years before I caught on. Most
> > organizations that even bother to teach synthetics consider it a highly
> > advanced, post-doctoral level subject. Only brainiacs and people with
> > seriously deep pockets need apply. In fact it should be part of Options
> > 101 and taught along-side the hugely complex topic of buying a call (or
> > put). If you're bright enough to buy a call, you should know that buying
> > a synthetic call is an alternative.
> >
> > Here are the basic synthetic equations:
> > long stock + short call = short put
> > short call + long put = short stock
> > long put + long stock = long call
> > short stock + long call = long put
> > long call + short put = long stock
> > short put + short stock = short call
> >
> > Note that each equation contains a stock, a call and a put.
> > Also note that the call and put in each each equation are
> > "corresponding. " that is they are the same strike and month. Also note
> > that the "=" is an approximation. To get it exactly equal you have to
> > make an adjustment for "cost of carry" (dividend & interest) and
> > put/call skew. Currently interest is about 0, so dividend and put/call
> > skew are the primary influences. Dividend can be looked up many places
> > and put/call skew is the result of the difference in implied volatility
> > of the call and the put. Also easily identified. When the equations get
> > out of whack a few cents the market makers or anyone else with a near 0
> > commission will force it back into balance by buying a real (stock, put
> > or call) and selling the synthetic (stock, put or call). Or the reverse.
> > It's called an arbitrage and is a guaranteed profit. If you buy a call
> > and sell a synthetic call for a credit, you have a risk-free guaranteed
> > profit at the instant you do it. No pain no strain, just money in the
> > bank. For the retail trader the cost of the commission + B/A spread is
> > typically more than the arbitrage opportunity.
> >
> > When putting on a position, it doesn't hurt to compare the real to the
> > synthetic. As often as not, you can buy a nickel or dime cheaper getting
> > in and sell a nickel or dime better getting out. Or vs. The real and
> > synthetic never get far enough out of whack for the retail trader to
> > take advantage of the arbitrage, but you can pick off a nickel or dime
> > here and there nevertheless.
> >
> > If you are considering paying for trading/options education, ask if they
> > teach synthetics. If they don't teach synthetics as part of the basic
> > package you're being scammed. Synthetics should be taught well before
> > anything as complicated as a spread (of any type).
> >
> > Keep in mind that anytime you are short anything real (as part of a real
> > or synthetic position) you are subject to the whims of the other party.
> >
> > regards,
> > david
> >
> > Jocelyn Palmer wrote:
> > >
> > >
> > > Watch out call it a synthetic. I was yelled at, told I was stupid, and
> > > taken to task for using this term on this web board. It quelled my
> > > enthusiasm for sharing with the group.
> > >
> > > I use the strategy, but with varying degrees of success. I am still
> > > working out the details of management, so I hesitate to offer any more
> > > opinions. Initially, I thought that I would roll the front month for a
> > > few expirations, but I have discovered that it is better to close the
> > > entire spread and reset. I am not sure if that is a symptom of the
> > > current market condition or not.
> > >
> > > Jocelyn
> > >
> > > --- On *Wed, 4/7/10, scott volkers /<flyspv@yahoo. com>/* wrote:
> > >
> > >
> > > From: scott volkers <flyspv@yahoo. com>
> > > Subject: Re: [ConservativeOption Strategies] Diagonials
> > > To: ConservativeOptionS trategies@ yahoogroups. com
> > > Date: Wednesday, April 7, 2010, 2:02 AM
> > >
> > >
> > > Hi Tom,
> > >
> > > I had looked at that and yes it is considered a synthetic covered
> > > call. I have found it locks up a lot of capital, but I find it
> > > hard to find enough premium to make it worthwhile on the short.
> > >
> > > I have traded diagonals and calendars more. I am curious if you
> > > are targeting certain historical volatility or IV as part of the
> > > formula. Calendars I shoot for conservative 15% return and exit.
> > >
> > > Scott
> > >
> > > ------------ --------- --------- --------- --------- --------- -
> > > *From:* Tom Clark <tec@thomark. com>
> > > *To:* ConservativeOptionS trategies@ yahoogroups. com
> > > *Sent:* Tue, April 6, 2010 11:36:01 AM
> > > *Subject:* [ConservativeOption Strategies] Diagonials
> > >
> > >
> > > I don't see the diagonal strategy discussed here. Diagonal - short
> > > front month call covered by DITM long call 9 to 15 months out. I've
> > > also heard this call a synthetic covered call. I've been very
> > > successful using this spread over the past year both for individual
> > > stocks & ETF's. Are there others here using this strategy? Care to
> > > share your comments?
> > >
> > > Current positions - XLF, IYR, MDY
> > >
> > > Thanks
> > >
> > >
> > >
> > >
> > >
> > >
> >
>
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