Say you have an ETF/stock/whatever in a consistent downtrend but occasional spikes, like the VXX. You want to profit off this, but limiting potential losses on a spike, whilst maximizing return on risk. You can not be short gamma/long theta, because that constitutes to "unlimited risk". But you know at the same time, that the realized variance is consistently lower than implied by the swap rate, therefore being long risk premium is a consistently losing game. So your goal is to profit of the downside delta, limit risk, and pay the least theta possible to do this. Would you in the long run be more profitable buying puts at for example, ATM + 3 (less theta, but more upside delta risk), or buying pure ATM puts (most theta, little delta risk)? I mean, if being long theta is consistently a losing game, you'd think buying as little extrinsic value as possible would be the best solution? And even exchanging some theta for more potential upside delta losses would also be profitable? The best thing would be pure deltas instead of using options, but then you have no way to limit upside risk. But for some reason, I feel I'm off on something,so if someone can help my brain model this...Maybe there is some better option structure to achieve what I'm looking for. So far I've only looked at long put options.
Options is a negative sum game. Therefore, the buyers and sellers of premium, as two groups, could both be losing.
pick a strike you calculate your instriment will drift to, and put on a calender spread at that strike.. and figure on the premium you pay is your stop loss.. with a vxx like instriment thats a limited risk play using a calender.. same as a short delta fly.. there is alot to consider with any decaying etf.. so goodluck