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
value of the option diminishes over time even though the underlying stock
remains stagnant. Time decay occurs because the extrinsic value
<http://www.optiontr
known as the Time Value, of options diminishes as expiration
<http://www.optiontr
expiration, options would have completely no extrinsic value and all Out Of
The Money (OTM) Options
<http://www.optiontr
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
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
progressively lower for In The Money (ITM)
<http://www.optiontr
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
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
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
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
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
position is held all the way to expiration. In this case, Options Delta and
Gamma <http://www.optiontr
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
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
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
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
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
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
[mailto:ConservativeOptionS
Palmer
Sent: Saturday, April 10, 2010 8:02 AM
To: ConservativeOptionS
Subject: Re: [ConservativeOption
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@aol.com> wrote:
From: joe & leigh <gass20@aol.com>
Subject: [ConservativeOption
To: ConservativeOptionS
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.
0yahoogroups.
>
> 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.
0yahoogroups.
> 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
> >
> >
> >
> >
> >
> >
>
Attachment(s) from Larry Grimes
1 of 1 File(s)
No comments:
Post a Comment