Negative Theta Options over Weekend

If decay begins accelerating the day before the break, is it better to just exit theta decaying positions around 12 EDT Friday, unless a position looks particularly strong?

Thanks,

Greg

 

A trader I know also told me that the MMs start lowering the implied volatility a bit above normal to adjust for the weekend, and then raise it a bit above normal on Monday. Any remaining gap is much less than would be anticipated by a model. I get the idea -- no obvious holes in the market.

Thank you all for answering!

Best Regards,

Kevin

 

Actually the market does not lower the volatility during the day on Friday they start pricing the options for the days ahead. For example these days just about every pricing program any firm uses will start adjusting there markets early on a Friday assuming its not a wild day in the market.

Selling on a Friday to collect the weekend decay is almost never a good strategy for a retail or small trader. The weekend will be priced in and you’re not collecting much while you’re taking on the risk of short options.

 

Mr. BeatingtheSP500,

For kicks I looked at your site. Quite frankly there is no malice intended by my comments but you have some serious legal issues and a lot of outright wrong information. (I will refrain from noting all the misspellings and grammar errors on the site)

I will cut and paste right from your site to aide the discussion:

Here is your text:

“vs the SP500 for the period Aug 14, 2007 (the start date of the fund) and July 24, 2008. This figure represents the liquidation value of the hedge fund on a daily basis and includes fees, commissions, interest, etc. Put another way, the S&P 500 closed at 1252.54 and my fund closed at 1654.15.

This fund is a net long fund comprised mostly of short positions in SPY puts and calls, and a small percentage of long OTM calls and puts.

Nasty day today, underperformance due to a slight levering of beta from 1.2 to 1.5 and an increase in the implied volatility of the large amount of short option positions.

There is a philosophy to my trading and I will be revealing it over time. It's a brilliant concept but requires deftness in trading, as opposed to most other option strategies which you basically wait until expiration. i.e covered calls, iron condors, short straddles, etc. I would put my performance up against any long or neutral hedge fund. Of course the funds which have been short financials and long oil have had eye-popping performance. Something tells me that's not going to continue. I liken the banks to insurance companies and we've just had one helluva a hurricane. Historically, investing in insurance companies in times of disaster have paid handsomely as future premiums are increased to more than cover the disaster cost. Similar situation with banks. A few years ago the spread between interest earned on and interest paid was thin. It's pretty large now, check mortgage rates. And do you think they are making risky loans right now? As far as oil goes - the industrial revolution has used 1 trillion of the 14 trillion barrels of known reserve. Think about that we've used one-fourteenth in the past 100 years. Listening to mainstream media you'd think we've used 80% of the world's oil.

These results can be verified to a party interested in extending an employment/consultation oppotunity.”

++++++++++++++++++++++++++++++++++++++++++++++

My Comments:

You say you’re a net “long” fund, well the markets done pretty lousy over the period on your chart if you’re net long then you’ve probably done lousy too. Particularly if you’re short calls and puts on the SPY.
How do you have your own valuation on your “Fund” and place a value on it if you just trade options on the SPY? You’re not even comparing apples to apples. The SnP 500 is a cap weighted index based on the value of the 500 stocks in the index totaled in the correct cap weighting number of shares and then multiplied by the correct divisor. You say you have a fund value expressed in a number and then compare that number to the SnP500. You have no stock values to form a basis for your “fund” value. Also how would you have positions you closed out long ago in the closing price of your “fund” since you claim your fund closed at 1654.15? What does 1654.15 represent?

Your comment about having to hold the strategies you list till expiration is just flat out wrong. Each one of those strategies you say needs to be held till expiration should NOT be held all the way until expiration. Any reasonable trader should and will make adjustments to them or close them out long before expiration, in other words they’ll put those positions on and trade them.

Regarding insurance companies, you’re off the market there too. Insurance companies are in it for the long haul and it can take years and years to recoup losses from disasters. It’s also a VERY heavily regulated industry and it’s not easy to raise premiums. Besides you say you only trade puts and calls on the SPY, what’s that got to do with insurance companies?

Regarding your comments on the banks, yes there is elasticity in the spreads between where banks write mortgages and the interest they pay for money. The big issue is they’re not writing mortgages these days. In case you missed it there is a HUGE housing slump and credit is very very tight, meaning they’re not lending money freely these days. You also might want to notice that there are soaring rates of default and the CDO market (how they package up mortgages and sell them) is totally gone. There have been around 75 bank failures in the past 18 months and the gov't says brace for a lot more.

On oil, there are opinions all over the map on just how much oil is left and just how much we’ve used. In all of the material I have read no energy researcher has ever quoted the figures you posted. Where do they come from?

You have some pretty basic and serious flaws in your claims you might want to consider changing a lot of what you claim if as your web site says you are actually looking for employment or consulting work. Quite frankly I don’t see how you could have passed a series 7 exam without knowing some of this stuff.

 

I thank you for the time you spent reviewing my site. It's not a call to raise capital, it's really a blog of my PERSONAL hedge fund. If you can show me where in the site I say I want to raise capital I'll gladly change it. Here's how I calculate my performance: On Aug 14 2007 the SP500 was 1426, and I was full cash, so in this "competition" we both started at 1426. I tracked the daily liquidation value of my fund, and the shows the daily close relative to the SP500 from Aug 14, 2007.
As of July 24, 2008 the fund is +32.06% vs the S&P500, which I KNOW is a little above-average.
My goal is to beat the SP500, something that 75% of actively managed mutual funds do not do. And yes the fund is always net long via options on the SPY.
I am well aware of the housing crisis as I am a real estate appraiser and I SWEAR to you I was calling it a bubble before most anyone else. The sky is not falling though and my muddled point is that the LARGE banks will be OK, but that's op-ed. I guess I also need to proof-read a little more.
Again, I appreciate your time.

 

I personally refrain from claiming I called a move in the markets whether it be the real estate market or any other market after the fact. Its my belief that sort of thing is pointless on these boards. I do however realize that a lot of this kind of stuff fulfills people needs on these boards.

For the banks a large bank (BSC) has already failed so I would say they may not all be okay. It may also take years to reap serious rewards from owning them. But that’s neither here not there since you only invest in the SPY.

I don’t see where you have any “fund” per se. If you want to claim your net return is X% over a period that’s one thing but it’s a lot different then a fund with a closing value.

What is your particular strategy?

 

I did publicly state there was huge risk of a housing bubble a number of years ago, it's on an appraisers forum, I might even be able to find it, but that's neither here nor there.
My trading is governed by a philosophy, but I suppose the closest known strategy would be an iron condor but with the added dimension of timing the entry and exits of each of the 4 components.

 

So you're a market timer who legs into 4 positions? How is that a long fund?

 

Not quite. It's a net long fund, but there are 4 different types of positions each with 1 or more strike - short call, short put, long call, long put. The net position at any given time is LONG.

 

Fund? Its just your retail account right?


Basically it sounds like you try to time the markets. Legging into a position where you sell a bit of premium as you try to catch up moves in the market.

Good luck with that one.