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effect of future rollover on option prices
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effect of future rollover on option prices

  #1 (permalink)
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effect of future rollover on option prices

What is the effect when futures rollover on options whereby price of the new future for delivery is higher than older future contract.

Example: corn option dates On rollover we see time and time again the next future contract is priced higher than the previous. Example is corn on 11/22/ jumps in price on rollover to the new contract by about 10 points or so. If i wanted to mitigate this as i wanted to trade option spreads what are the possibilities ?

DEC 2013 CZ13
11/29/2010
11/22/2013
11/22/2013
MAR 2014 CH14
07/30/2012
02/21/2014
02/21/2014

If i want to hold an option from Nov-Dec through the rollover period i should then assume to buy the DEC2013 and attempt to rollover the option on 11/22 to hold into Dec.

Or would i be better off buying the CH14 in Nov before dec and just holding it.

When is the embedded price of the future calculated as obviously there is serious time decay on the mar 2014 as opposed to the dec 2013 but this may not matter depending on length of time contract is held for.

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  #3 (permalink)
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Theta normally increases as the option gets closer to expiration. A March 2014 option will have less Theta than a December 2013 when both have about the same time premium. Futures options are priced off their specific contract month futures and if you plan on holding a option for a long period it is normally better to purchase the longer dated option and avoid the costs of rolling the option position and the higher Theta of the first shorter dated option. Of course the lower Gamma of the longer option means it will rise less if the move you are looking for comes early. There are no free lunches.

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Nice response Bookworm. Say for instance you had a seasonal factor you wanted to trade.

This seasonal was from the 1st of october to the end of october. natural gas.

Now the options for NG expire on (NGX13) Oct28th:
http://www.ccstrade.com/futures/natural-gas-futures-ng/options/

Which is obviously 3 days missing how could you position a trade to do this ?

Obviously buying a CALL on (oct 1st) for the 2 option contracts Oct 13 & Nov 13 And closing out the position on 1st november is 1 option but it doesnt seem like the smartest,

Maybe a call spread is better ?

Any comments what you might do in this situation?

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The smartest thing you can do is back test the two different option months and go with the one that produces the best results. Of course that assumes you have or can obtain the data. Without an empirical basis, you need to answer some questions. What are the characteristics of the seasonal factor? Does the move tend to happen early, late or steadily during October? How big is the move usually? Does it often continue into November? Do the October and November futures contracts tend to trade in sympathy or differently? I'm sure you can think of others. Keep in mind the shorter dated options will have more Gamma and Theta and give more bang for the buck when the market moves but will decay faster when it doesn't. Spreads add a whole new level of complexity that doesn't seem necessary to me when trading a simple seasonal trend but I'll admit I've never traded that way so I could also be completely wrong!

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Hi Bookworm,

Yes i tested on the futures alright that's where i initially got the data from but due to rollover etc i wanted to use option's as its hard to know if the data used has rollover jump effect.

Yes now to find an options backtest platform thats good any ideas ?

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