A strategy to limit the cost of time value

Hello everyone, there is a new article on this website I follow that I wanted to discuss.
The article is here: https://tradingmatex.com/options-as-stock-replacement/

After reading this, I have two questions I would appreciate your help on:

1. The article says that "in the last few days the gamma of the second strategy is higher if the underlying has moved up 1%". Can someone help me visualize the 2 gamma profiles of the 2 strategies? Do they really differ a lot in the last 5 days?
2. Related to a recent question I asked, if options are american-style and the short option gets exercised, I will have to excercise one of the long ITM options to avoid delivery (or to deliver if I am short a put). Wouldn't that be another element to consider when using this strategy as alternative to the simple long option strategy?

Apart from this, it looks quite interesting approach and the second point would not even be an issue on all european-style options.

 

RE: A strategy to limit the cost of time value.


Simple solution - trade options closer to expiry. They are cheaper due to less time value.

 

I have never tried this. It reminds me of a backspread, except that the short option has lower delta than the 2 long options. I just skimmed the article, but I'm confused why the time premium is said to be flat, yet the theta is still net short (-7.263). That doesn't sound like "nearly zero" to me.

I tried setting up the type of trade listed in the article in my own account and noticed we couldn't get to theta neutral with a 2:1 (long:short) ratio at the strikes I checked. However, it was relative easy to get to the profile the article alludes to using other ratios, such as 3:2. I saw a 3:2 spread with .11 theta, .024 gamma, and -1.7 delta. I like how the trade was both positive gamma and theta.

Of course, there's still market risk: If the market rises, the trade loses, but only in the amount of the premium. (I suppose that goes without saying, but it shouldn't be forgotten.) If nothing happens, the spread should appreciate into expiration.

I also notice Vega is lower (although still positive) in this spread, as compared to owning the Put outright. That may be desirable if one is seeking a stock substitute, without the variable of volatility.

As to assignment issues, I would think the ITM legs hedge perfectly well, especially if staying in a single expiration cycle. If you're really concerned about assignment, trade index or European expiring futures options (as you pointed out initially).

 

Hi @stevenpaul I am not sure why the theta is negative but if you look at the scenarios tables under the plots, if underlying doesn't move the P&L at expiration is just -1 USD. So I am not sure why the platform shows a negative theta.

Do you have the chance to plot the strategy as you built it? Also, is it possible to see how the gamma profile looks like close to expiry as opposed to the gamma of a single put with same initial delta and expiry? Thank you!

 

Google Zebra trade and you will have all the info you need.

 

This is another ridiculous trade "invented" by TastyTrade to peddle to the TastyLemmings who don't understand option basics ... even Tom Sosnoff called it a 'stupid' trade recently

The trade suggested in the article is with SPY Spot at 443
... sell 1 x 445 ITM Put
... buy 2 x 450 ITM Puts

Apply a little dissection and you can see the trade is equivalent to
... buying 1 x 445 ITM Put
... selling 2 x 445-450 OTM Call Spreads ( to finance the purchase of the Put )

If that's what you want to do ... then fine, make the trade ... but to dress it up as some ITM Put Combo that few TastyLemmings will understand and calling it a 'Zebra' is unhelpful at best ... drumming up trading commissions at worst ...

 

LOL I didn't say it was a good trade I merely pointed him to where more info was.

 

Must have mis-understood when you were recommending the Zebra as trade :-}}

 

I agree it is silly to distinguish between synthetically equivalent positions. Although in this case, the dissected position you mention does seem to have 5 legs instead of 3. Perhaps the article's trade is the better version of this position (unless the wider ITM spreads offset transaction savings).

 

Not quite the position I assembled yesterday, but today's trade was quite a departure from yesterday's!

I noticed that if the short leg is slightly OTM, the Greeks are more helpful: longer gamma and longer theta. But you asked about all legs ITM.

The gamma goes negative closer to expiration, it seems. Play around with the trade and post the graph.