front-month or next month ATM

Discussion in 'Options' started by 0008, May 12, 2005.

  1. 0008


    Are the time value of front-month ATM erode much faster than next month(or later) ATM?
  2. MTE


    Front-month have much higher time decay than further out. Options lose 1/3 of the time value in the last month.

    Just bring up a chain and look at Thetas across different months.
  3. 0008


    I am interested in directional trade. I would take profit or loss in a few day times. Is it better to choose a next month ATM so I lose less time values?

    Where to brind up the chain? Thanks!
  4. MTE


    If you in and out of the trade within a few days (I assume, 1-3 days) then front month is better, as they have much higher Gammas.

    I don't know of any free site that let's you see Thetas in chains, but your broker may have it.
  5. Trajan


    I would say look at two things. First would obviously be the implied volatility, this may be substantially cheaper in the next month out. This could be important as a rally could cause the front month to come in. Next, the bid/ask spread could be wider in the next month and could cost you .10 or .15 for an entry/exit. I've been buying the 2/3 month out options as IVs are fairly cheap right now. It gives you more time for stuff to work and you aren't really paying that much for it.
  6. 1) If you are a very short-term trader, theta is unimportant (unless it's expiration week).

    2) If you want the maximum price movement with the option, you should prefer (as already mentioned) front month because the options have a higher gamma - that means that the delta of the option increases more rapidly. It's similar to compounding earnings when the stock moves in one direction.

    3) The time premium in an option is proportional to the square root of time. thus, a 4 week (month) option has twice the time premium as a one week (month) option. And a 9 week option has three times the time premium of a one week option.

  7. Can you explain this a little more?
  8. Using this calculator: - IVolatility Services

    (but there are other calculators to use),

    Stock = 50
    Strike = 50
    Int = 3
    No dividends
    Volatility = 40

    Days; Call Value

    10; 1.34
    40; 2.72 (roughly double)

    20 ; 1.91
    180; 5.92 (triple)

    the TIME value of an option (not the intrinsic value) doubles when there are 4x as many days remaining. Double is the SQRT of 4.

    Or, 1/2 the time value disappears when 3/4 of the time passes

    The TIME value of an option triples when there 9x as may days remaining. Triple is the SQRT of 9.

    Or, 2/3 of the time value disappears as 8/9 of the time passes.


  9. I like your username

    #10     Nov 6, 2008