How to hedge theta?

Discussion in 'Options' started by Nashequilibrium, Jan 22, 2008.

  1. Is there a way to hedge theta? It does not have to be 100% hedged as i doubt that is possible but if at least 60% can be hedged. Does anyone do this?

    Thanks in advance.
  2. ?.....yes.......How? With other
  3. MTE


    Depends on your position. If you have a long call, for instance, then you can sell a higher strike call to convert into a vertical and partially hedge theta. As always, this has a trade off though.
  4. bidask


    how about the ultimate hedge that applies to all non-arbitrage hedging. just buy or short less of it.:)
  5. What if i buy a long call, then sell a put at the same time and delta hedge the put, so as to profit from the theta earned. The theta profits less the delta hedging costs could cut into the theta costs of the long call.

    Does this sound viable?
  6. MTE


    Long call + short put = synthetic long stock, which has 100 deltas and zero theta/gamma/vega. Then you would short, say, 45 shares to hedge the delta of the put and bring your total position to long 55 shares. Sounds like an amazing strategy...your broker will love this!
  7. My aim is to finally profit off the long call. I trade currencies therefore could you tranlate from stock language to fx language.

    Thanks for the info.
  8. MTE


    There's no "other" way to profit from the long call than the obvious one, if you know what I mean.

    OK, it doesn't matter whether it's stock, commodity, index or fx. Long call + short put = long synthetic underlying, in your case whatever currency that is. The underlying has a delta of 1 (that's per 1 unit of underlying) cause it moves 1 for 1 with the underlying. Long call + short put (at the same strike) give you a total delta of 1, hence the term synthetic long underlying. If you then short the underlying to hedge the deltas of the put, which may be say 0.45 (per 1 put option) then you end up with 0.55 long underlying.

    In other words, you are making 3 trades to achieve what can be achieved with just one trade in the underlying.
  10. MTE


    You can't reduce theta without paying for it somewhere else. There's always a trade off somewhere.
    #10     Jan 22, 2008