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This is what I use to judge the reward aspect of the trade. I took the 65 strike Nov price of 0.65 and subrtacted the Aug price of 0.07 giving a 3 month potential erosion of 0.58 or $580. This equates to $193.33/mth erosion.
This assumes prices stay constant which they won't, of course, but i need to use something to judge whether prices are currently "cheap" or "expensive"
Regards
Brit
Can you help answer these questions from other members on NexusFi?
Yes, exactly that, a rough estimate at todays value.
Although not linear, in futures options especially CL, erosion seems to be more even from 3 to 5 months out and by 2 months out it is no longer worth holding to expiry. Unlike equitiy options where the greatest rate of decline is in the final month, with CL the final month has virtually nothing left in it.
For example CL 70 strike: Jul exp 0.02, Aug 0.14, Sept 0.50, Oct 0.85, Nov 1.20
so the difference from Nov to Oct is $350, Oct to Sep is $350, Sep to Aug is $360
BUT Aug to Jul is $120 and Jul to expiry only $20 dispite still having 3 weeks left.
Please, help me understand something that should be very simple but for me is beyond my simple mind.
I have the idea to sell call options of coffee. It has a cash price today June 2 of $193. I believe that prices may go down more, and the market also believes it because the July coffee is at $157 (take note that the July options expire in 6 days).
I see that the July 150 put is selling at $157, for only 6 days to go. Now, my question is, how is it possible that somebody is willing to pay $157 for an option more than 40 points away?
I also learned from Cordier's book as well as some others back in the early 2000s. And, I happily sold ratio spreads on ES and 6E for 6-7 years. But, my account blew up with margin in 2007 when the first bank failed. They cleaned me out in 2 weeks while I was trying to manage my option positions. Evidently, you were luckier than I. Now, I don't have enough to sell options.
I donīt know why I had the idea that the day of the expiration of the options the cash price and the futures price becomes the same. So, actually the cash price of coffee will have to come down from $193 to 150 or lower to make the 150 put IN the money, to make me lose money.
You are basically correct that the cash and futures prices will converge at expiry.
The problem seems to be your cash price! The chart i have included shows cash price is 1.58 which is almost the same as July futures of 1.5750. Cash price has not been 1.90 for months
Unless you are trading spot, it doesn't really matter. Options are based on futures, not spot, which settle financially ( At least the KT does, dunno about KC )
The prices will converge, but you don't know which way. Say the futures are in contango, you don't know if the spot will rise of the futures will fall. So I would just stick to the futures price and just look at backwardation & con tango for reference.
