How do you avoid time decay problem in option even you are right in the direction?

Discussion in 'Options' started by MoreYummy, Dec 18, 2009.

  1. How do you avoid time decay problem in option even you are right in the direction?

    Even with limited profit, as long as the time decay is not an issue.

    Is there a strategy for it, or combination?

    I dont find this in the option strategies, maybe i miss something or simply not possible.

    thanks.
     
  2. ddlee

    ddlee

    Dont be buying Jan options be buying May or even later. The more ice (time ) you buy the slower it melts
     
  3. Direction has nothing to do with it.

    When you buy an option, you also get negative time decay. There is no solution to this problem.

    However, if you hedge the trade by buying a call spread (or combination) or put spread - instead of buying only a call or put, then your time decay is decreased significantly.

    But, as you already seem to be aware, it is not eliminated.

    If you want the power that comes with owning an option - and that power is positive gamma, then you are going to be forced to live with negative theta (time decay).

    Think about this: If options did not decay - no one would sell them - and you would not be able to buy any options.

    Mark
    http://blog.mdwoptions.com
     
  4. Ok.

    Regarding the put/call spread, im long a closer strike, and short further from money strike in same type of option?

    This way the time decay should be reduced somewhat. Profit will be limited when the price passed the further strike option.
     
  5. erol

    erol

    buy intrinsic value

    fight time decay buy buying a few months time and/or buying slightly ITM

    close any long position with 1 month left


    or you can trade verticals. So within a certain price range, your short contract's theta is larger than the long contacts negative theta, so your overall theta is positive.
     
  6. OP,

    You'd have a positive time decay if you trade a spread. The only thing you 'd have to check, is that the option sold is near at the money.
    Assume the spot is around 100. A call spread 80/100 (you buy the strike 80 and sell the strike 100) has a positive time decay. A put spread 120/100 (you buy the 120 and sell 100) too.
    As a matter of fact, a long deep in the money call/put spread (both strikes are in the money) will often exhibit a positive time decay.

    Masteratwork
     
  7. calendar spread, which gives you positive vega & theta; however, you'll be negative gamma... No free lunch...

    Walt
     
  8. sell a call if bearish and sell a put if bullish...easier than worrying about time decay of buying a put or call in the right direction
     
  9. Thanks for idea, everyone.
     

  10. yup.. and if your direction is wrong. the pay unlimited for a limited profit .

    all said and done, no matter which way you skin the cat, if your direction is wrong you loose and if correct you win..
     
    #10     Dec 20, 2009