It's BACK!!!! Since we are reminded about love this weekend, I thought it would be a great time to bring back the eoccuring piece at Option911 that everbody loves, the MAILBAG. Keep the great questions coming!
Mark,
Are you following an indicator when you noticed that the market began to account for weekend time decay or do you just see the price adjustments relative to index volatility?
For instance, I have my SPX book. About 10AM EST, a lot of profit came into the position as the market began to climb, volatilities fell off a bit, and what I’m guessing was the beginning of weekend decay. Then, throughout the day, without placing any trades, most of the morning profit began to leave the position and I ended the day nearly flat. This was unexpected for a positive theta, flat delta, negative weighted vega setup.
My question: As most of the premium I’ve sold is in the wings with .35 delta or less, and while the ATM options are experiencing measurable time decay, does the market hold the value of OTM options further into the weekend to account for event risk? I had always thought the wings expire more quickly, however I know this is their theoretical expectation.
Thanks,
Ek
EK,
Sadly there is no sure fire way to measure weekend decay. What I will notice is that IV begins to fall, somewhat rapidly sometimes, for no particular 'market' reason. Then I will look at Time and Sales, and notice it is almost all sales on or near the bid. For professionals, the key is watching time and sales. The pros will notice a lot of trades being traded on the bid, and the market for these options falling. That can be a pro's clue that the weekend is coming out. I know this is cliché’ but the longer one trades, the quicker they will get a feel for it.
It also helps to have an idea on how much decay the position should collect over the weekend, if a position has $300 of theta decay over the weekend, and the position makes $200 dollars in an hour on a Thursday, the market likely just priced out Friday night and Saturday. I wrote about weekend decay calculation a couple of days ago here: VIX and VXN Swapping-Weekend Time Premium Decay
As per your second question, every option is going to decay differently. Most market makers I knew would want to ‘sell the pream-own the dream.’ Meaning they want to sell a lot of quick decaying premium loaded ATM options. To hedge this, market makers buy cheaper options to keep margin lower and protect against a major move (the dream). Wing options do not have the same decay function as ATM options. While the ATM's begin to decay very rapidly at 30 days out or so, the wings will begin their decay earlier, but the final 1/3-1/4 of their value will take FOREVER to decay. This is because of the card game affect. In short, the ATM’s will decay out a lot more of the weekend then the wings, because the wings have cheap event risk value, and ATM options do not. I have written about this affect several times. For more reading go here: articles
Hello Mark,
With the holiday weekend decay already discounted, and with a VIX flush into the close, was today’s close a decent or poor time to buy an Apr/March ATM SPX calendar? Thanks!
Walter
Walter,
I typically don’t give out specific trade thoughts except at my day job with Sheridan Mentoring. Here is what I will say, if you checked the IV skew and it was not wide, and you don’t think IV’s are going to get crushed; you gave yourself a your best odds of winning. I will be interested in how much theta decay the position makes over the weekend. Take a little time and paper trade the same calendar (if you did it ATM, do the calendar on Monday ATM). Compare which calendar does better. It will be a good lesson on weekend risk.
Hi Mark,
Do you engage in options on the ES (futures S&P E-Mini)? I prefer writing OTM put options on the ES with about 5 weeks prior to expiration. Because of the 1:1 ratio of options contract to futures contract (whereas equity options are 1:100 ratio of options contract to stock shares), I usually adjust by converting to a covered short to protect against a further decline. The BIG challenge is if the market reverses. One consideration to addressing the reversal is to enter an OTM risk reversal on the 2nd cycle to help militate against the market decline. Of course, the challenge there is the risk of the OTM short leg of the risk reversal if the market were to drop precipitously. Therefore, I need to resist the urge to overleverage. I guess I could adjust by converting to a calendar. The challenge is the risk of a big drop in the market after converting to a calendar.
With a BIG drop from the short strike a conversion to a covered put is best; however, if the market is range bound around the short strike, then a calendar is best. That’s the million dollar questions… will the market have a big drop or not below the short strike!!!!
Thanks,
Walt
Walt,
Don't let anyone every accuse you of not having brass balls. If you are selling naked downside, you must have an iron stomach. Here are a few thoughts on your inquiry:
Save a few things, the ES options are very similar to the SPX options. The main differences are the size, the trade times, and, of course, expiring into the future instead of into cash. I would also check to see if there are tax consequences of the ES vs. the SPX. I would never touch SPY, unless I couldn't afford ES or SPX. If that was the case I would skip trading options.
As far as the downside sales, I would consider selling credit spreads instead of naked puts. Another option I would consider is to sell put diagonals, taking advantage of front month decay and holding the slower decaying long term put.
Hope that helps.
Mark,
Is there any way to trade spot VIX? It would be nice to have a way to trade the spread. All instruments I looked at had VIX futures as the underlying, which doesn’t correlate too well with the spot VIX.
Sina
Sina,
The closest thing to trading the SPOT VIX that I can think of is to trade straddles in the SPX. You don’t get the full array of the VIX but if one considers how the VIX is calculated, selling or buying a March straddle in the SPX might be a pretty good way to trade VIX deltas. I would have to do some more research on the subject, but it might be worth checking out. My friend Bill of VIXandMORE might be a good person to ask about this. He is also a contributing editor to EXPIRING MONTHLY our new magazine.
Thanks for all the great questions, if you ask I will answer. Keep them coming. On Monday, I am going to try and enter the NDX SPX swap as I think the time has come to enter the trade.
Happy Valentine's Day to my wife Lauren. You are wonderful for so many reasons: You are kind, loving, beautiful, fun, smart, a great mom and most importantly, willing to settle for a guy like me. I love you so much! You have my
-Love,
Mark
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