SPY Leaps Put Ratio Spread

On Jan 1, 2010
Your long a DEC 2012 put at 110 for $1700
and short two DEC 2012 puts at 90 for $950 each

If you had no choice, and 'HAD' to be in the position above until expiration or prices going below 900 on the underlying, what comes to mind as to how you would sell short term premium each month, or each 3 months, if it was allowed in our intial setup rules.

I know there's a million answers, and that no trader trades the same, and there's no holy grail, and on and on. Yes, that's true, but I want to observe the differences of how ET traders view the markets in this scenario as far as adjustments are concerned. You can PM me or send a passenger pigeon as far as I'm concerned, but I want YOUR thoughts. You might be thinking......

'Me?'

'Yes you!'

"You Sure?'

'What did I just say?

All kidding aside, your perspective is important to me, and i value all views.

 

1) It would be "better" to short-sell, shorter-dated, (2 to 3 months duration) put-options over and over that will indeed experience faster and greater time decay instead of LEAPS-puts.
2) You could reduce the strike price on the "long" put to reduce your cash outlay for the position.
3) You're in a race against time to earn more premium on the short-puts than what you can expect to lose on the long-put.

 

Thanks for your responce


1) It would be "better" to short-sell, shorter-dated, (2 to 3 months duration) put-options over and over that will indeed experience faster and greater time decay instead of LEAPS-puts.

So buy the 24 month leap put and sell 3 month options each quarter. Am I understanding correctly.

 

Yes. The theta kicks-in "best" at around 2 to 3 months out.

 

This kind of advice is exactly what I'm looking for. Thank you for your thoughts. J

 

You could also reduce your cash outlay by buying the 1 year put instead of the 2 year put. While the decay rate of the 1 year will be a bit faster, it will be less sensitive to IV change - good if it contracts, worse if it expands.

 

In your opinion, is it wiser to have the extra 12 months of time premium left in your 24 month long put option when the 12 month option expires, or the IV benefit you mentioned in a 12 month set up vs our original 24 month position.