Super long expiration leaps

Discussion in 'Options' started by Abundance Magnet, Jul 9, 2018.

  1. interesting... with spreads as wide as they are LEAPS (especially less liquid names), sounds like the spread game is even worse on these products. i.e. underlying has move a lot before the position is profitable
     
    #21     Jul 10, 2018
  2. ajacobson

    ajacobson

    One could argue spreads need to wide in long dated stuff because as you go longer in time volatility becomes less important. Not unimportant. Longer dated stuff the swap rate becomes much more uncertain. What will rates be in 5 years - 10 years - or 15 years?
     
    #22     Jul 10, 2018
  3. sle

    sle

    spot or DP?
     
    #23     Jul 10, 2018
  4. sle

    sle

    That's not really true, right? You going to have a massive increase in rate and dividend sensitivity as your expiration moves out. For single names it gets even trickier, since you have to make all sorts of assumptions about borrow and dividends.
     
    #24     Jul 10, 2018
    ajacobson likes this.
  5. sle

    sle

    Mkay, I think you are thinking about it in a wrong way. In a vanilla black scholes, your strike is discounted, but both terms inside the normal distribution are also dependent on the interest rate (so your mean grows as you are discounting). My suggestion is not to bother with the discounting (at least for now) - it get's really complex once you go there, there is a reason why everything long-dated trades with deferred premium.

    You can just use Black 76 which is discounted externally and it assumes that the forward price is the random variable (which is better for long-dated options for a variety of reasons, not the least being funding/collateral complexities). For example, 5 year was quoted around 15% this morning, that's in terms of deferred (undiscounted) premium, while 2 year was just over 8%.
     
    #25     Jul 10, 2018
  6. ajacobson

    ajacobson

    You can see every exchange Flex trade at the OCC site.
     
    #26     Jul 10, 2018
  7. truetype

    truetype

    Absolutely, but for OP's purposes ρ is still a second-order effect, unless I'm missing something, and long'ish dated options are dominated by vega. If OP actually wants an interest rate play there are much tighter, higher bang-for-buck ways to make that bet than trying to squeeze a little ρ out of an options position.
     
    #27     Jul 11, 2018