After reading about QID_Trader's BMW puts collapsing, i found it rather amusing that someone uses front month options, with a week left for expiration, for swing trading (assuming it's a real position).
If you are trading front month options, with less than two weeks to expiration, don't do that, unless you are just daytrading for just a quick move. Assuming you are holding QQQQ April 45 puts, who's premium happens to be .59 and has a theta of .028, it would take only 2 days to lose .056 in just time decay alone. In other words, the time decay in 2 days alone would cost 10%. Yikes ! Option premium to Theta ratio works to be 5% in this case and increases non-linearly into expiration. If you day trade, the spreads kill you. If you swing trade the theta kills you. That's why i hate front month options.
On the other hand, QQQQ May 45 puts has a premium of 1.01 and a theta of .012. In this case the premium to Theta ratio works out to be approximately 1.1 %, which is manageable time decay if one is swing trading. I would personally not swing trade any options, unless the premium to theta ratio works out to be around 1%, which is generally the case for options with 4-5 weeks left until expiration.
Trading front month options
Started by
NAV
, Apr 13 2007 12:29 AM
1 reply to this topic
#2
caspary
-
- Traders-Talk User
- 682 posts
Member
Posted 13 April 2007 - 06:35 AM
After reading about QID_Trader's BMW puts collapsing, i found it rather amusing that someone uses front month options, with a week left for expiration, for swing trading (assuming it's a real position).
If you are trading front month options, with less than two weeks to expiration, don't do that, unless you are just daytrading for just a quick move. Assuming you are holding QQQQ April 45 puts, who's premium happens to be .59 and has a theta of .028, it would take only 2 days to lose .056 in just time decay alone. In other words, the time decay in 2 days alone would cost 10%. Yikes ! Option premium to Theta ratio works to be 5% in this case and increases non-linearly into expiration. If you day trade, the spreads kill you. If you swing trade the theta kills you. That's why i hate front month options.
On the other hand, QQQQ May 45 puts has a premium of 1.01 and a theta of .012. In this case the premium to Theta ratio works out to be approximately 1.1 %, which is manageable time decay if one is swing trading. I would personally not swing trade any options, unless the premium to theta ratio works out to be around 1%, which is generally the case for options with 4-5 weeks left until expiration.
Now that's solid advice. Thank you very much. I still hope the markets drop today so the QID can exit and continue with what may become a long life at trading. I did say there are good traders and good advice here!
