Never long front month call/put?

Discussion in 'Options' started by turkeyneck, Dec 21, 2010.

  1. I'm reading Guy Cohen's "The Bible of Option Strategies". He said the limited time before expiration and the steep time decay at expiration month are really working against you. He recommends long call at least six months out or even buy LEAPS if you really want to make a directional bet and sell before expiration month to avoid steep time decay. LEAPS and longer term options are "better value" on a monthly basis (front month vs 12 month option divided by 12). Any thoughts?
  2. MTE


    Personally, I don't think you can make such a general statement as sometimes the situation warrants the use of short term options. You just have to be aware of the trade off between short term and long term options.
  3. I'm long AAPL Jan 10 320 Call. It has a theta of 0.12. Is there anything I can do to hedge theta, especially this coming long weekend? Bull call spread?
  4. MTE


    The first question you should answer is why are you holding that call!? Are you expecting AAPL to move up strongly? If you are then you may want to just sit tight and pay the cost (theta). If you don't expect it to move up strongly then converting into a long call vertical may be a good idea.

    As I mentioned in my first post, there is always a trade off - short term options are very sensitive to changes in the price of underlying, but at the same time you pay the price in time decay. Longer term options and spreads are not as sensitive, but the time decay is more forgiving.
  5. Wilt


    I know you're looking for a hedging/technical type of answer, but, you're missing the forest through the trees...there is nothing wrong with front month options, if you are confident in how the security will move. I would hope you are, since you bought into the damn thing, but I know there are a lot of you who just use math to make a fairly small return with no real knowledge of how the underlying will trade. If that's your strategy, I obviously have nothing to offer you. I would suggest you improve your core edge before worrying about the math of possibilities. You have to be right first, imo.

  6. It is 101 Option Class, however, when you are in the real world, you will realise sometime you need to long the front month (or even front week) options.

    LEAP is always a bad choice IMHO. :D
  7. The atm will approximate 50 deltas (rate0, div0); whether weekly or LEAPS. An intraday $0.50 is 25% on a $2.00 weekly call, while only 2.5% on a $20 LEAPS call. Trade short duration if you want to avoid taking large vega bets, and trade long duration if you're looking for vega.

    gamma/synthetic vol vs. synthetic time/gamma

    The LEAPS appear conservative, but what you gain on duration leaves you exposed to volatility. Go as far out on duration as you feel comfortable if you're attempting to isolate sensitivity to implied volatility. Short duration options are a play on direction and/or stat vol + vol^vol.
  8. Sometime I just want to laugh as some so call expert even "educate" people that LEAP is similar to the stock it self, you can buy and hold .. :D
  9. Well, I would never go directional without doing a spread. For what timeframe to buy, I calculate the average holding time for my system, then double that and buy spreads in that month. Ergo, if average hold is 21 trading days, which is one month, buy spreads two months out in the direction indicated, etc.
    Obviously, if average holding time is something like two days doing a weekly would certainly work.
  10. drcha


    Do you like to hit a lot of singles, or are you happy to strike out most of your times at bat, waiting for the perfect home run pitch? I am a singles gal, so that is the bias I bring to this analysis. If I really think you have the direction right, I believe I am better off with a near-term deep in the money option than a LEAPS. Time value is negligible. Yes the ITM is more expensive; building in a higher probability of profit lowers your percent profit. The bid-ask is not ideal in either case, so it is best to choose liquid underlyings.
    #10     Dec 22, 2010