Time decay difference between weekly SPY and Quarterly SPY

Discussion in 'Options' started by i4i, Aug 24, 2011.

  1. i4i


    Some enlightenment on this esoteric subject matter would be appreciated.

    Ok, so here's my dilemma based on these facts:

    1) I want to indulge myself by buying the SPY call tomorrow.

    2) My holding period is exactly 3 days.

    3) The premium for the weekly options is cheaper than the quarterly options.

    4) 3 days being less than a week (and weekly premium being cheaper), it's more intuitive to buy the weekly than the quarterly.

    The unknown is the "time decay". For some reason, I feel I would lose more on the weekly due to a bigger time decay.

    Considering that I buy the call tomorrow, the weekly has roughly 6 days until expiration and the quarterly about 15 days. Can anyone shed some light on what the rate of difference is between the two options for, say, the next 3 days?
  2. rmorse

    rmorse Sponsor

    If your option program gives "Theta", that will be the estimated decay per day for that option if Implied vols don't change.
  3. heech


    Time decay is also going to be related to the delta/gamma, or how much the option will gain or lose in value as the underlying moves in your direction.

    The weekly option is really just a leveraged directional play (with known max loss). If you're only holding for 3 days, then presumably you have a strong feeling on direction... so take the weekly.
  4. FYI weeklys wont last 6 days, they end on fridays I think. RTFM.
  5. i4i


    Actually, I was counting forward (eg. thursday-->friday being 1, etc).

    So is there no metric that I can use to gauge the difference between the two options? Since this is a directional play, wouldn't the implied vol. remain constant for both premiums? If so, I imagine only the theta will be affected. So my question is (or was): since the weekly option has a shorter shelf-life than the quarterly, wouldn't I lose more on the time decay if I held for 3 days?
  6. rmorse

    rmorse Sponsor

    This is more simple than everyone is making it. If you're concerned about decay over a period of time, compare the theta and make a decision. Along with the higher theta of near term options you get lower premiums and more gamma. You'll have to balance all that with your expectations. The hard part is deciding what you expect the security to do and when.
  7. uptickk


    In addition to what has been already said above time decay occurs at an increasing rate as expiration approaches. Holding all else equal between the two expirations the weekly time decay as a percentage of the option value will occur faster.
  8. rmorse

    rmorse Sponsor

    That's true. I was trying to answer the question without regard to what I would do. He asked if their was a metric for comparing decay between two options, and there was a simple answer. Everyone made that so complicated.
  9. uptickk


    I stepped away from the computer before hitting submit and didnt see your reply. Your answer was straight to the point.