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How to trade SPY options? Need some help!
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How to trade SPY options? Need some help!

  #21 (permalink)
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  #22 (permalink)
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SPYtrader View Post
I'm used trading SPY but I want to use some leverage on some trades by using options.

Here's a sample situation:

SPY trades 205.
I want to take a LONG trade.
I think it SPY will go to 210 in the coming days/weeks.
I will keep it max 30 days.
How do I choose which call option I want to buy (which expiration which strike)?
What will get my the best return?
I'm willing to loose my entire stake I put in this option trade if it trades below 205 in 30 days.


For strike:

You can chose any strike you want. In the way you want to use options, you seem to want to use options as a stock substitute so ATM (50 delta) is the strike you want.

For DTE:

For expiration you said you want 30 days so chose the first expiration that has at least 30 DTE but avoid paying for time that you don't want by selecting the option that has the lowest DTE but has at least 30 DTE.

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  #23 (permalink)
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Your at the money .50 delta 30 day option is worth about $4.85. If the market does nothing at all, it will be worth $0.00 in thirty days, and you will have lost your entire investment without the market even going down.

As a matter fact, you will lose money even if the market goes up. If the market goes from 205 to 210, then at expiration you will net a whopping $0.15 on the trade.

If you want to bet on direction with a long call, do it with one deeper in the money, say around a .90 delta. These will be much pricier, but the price is more intrinsic than extrinsic. They will be less subject to time decay, though price risk is higher with these.

Actually if you are bullish, I would rather sell a put spread and put some money in the bank. Let some other sucker buy premium.

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  #24 (permalink)
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coolway View Post
Your at the money .50 delta 30 day option is worth about $4.85. If the market does nothing at all, it will be worth $0.00 in thirty days, and you will have lost your entire investment without the market even going down.

As a matter fact, you will lose money even if the market goes up. If the market goes from 205 to 210, then at expiration you will net a whopping $0.15 on the trade.

If you want to bet on direction with a long call, do it with one deeper in the money, say around a .90 delta. These will be much pricier, but the price is more intrinsic than extrinsic. They will be less subject to time decay, though price risk is higher with these.

Actually if you are bullish, I would rather sell a put spread and put some money in the bank. Let some other sucker buy premium.

Good points except I am personally not a fan of deeper ITM options since they cost too much. Can you explain more about how they're not affected by time decay as much as other options?

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  #25 (permalink)
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vitrader View Post
Good points except I am personally not a fan of deeper ITM options since they cost too much. Can you explain more about how they're not affected by time decay as much as other options?

Delta is a measurement of the options rate of change as related to the stock price. Theta measures how the option is affected by time decay. The higher the delta, the lower the theta. The higher delta option will track in value closer to the underlying than the lower delta option.

If you buy the .50 delta option, and the stock goes up $5, the option will increase in value by about $2.50.
If you buy the .90 delta option, and the stock goes up $5, the option will increase in value by about $4.50.

If it takes two weeks for the move to happen, then the .90 delta option will lose less value to time decay, because its theta is lower than the .50 delta option.

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  #26 (permalink)
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coolway View Post
Delta is a measurement of the options rate of change as related to the stock price. Theta measures how the option is affected by time decay. The higher the delta, the lower the theta. The higher delta option will track in value closer to the underlying than the lower delta option.

If you buy the .50 delta option, and the stock goes up $5, the option will increase in value by about $2.50.
If you buy the .90 delta option, and the stock goes up $5, the option will increase in value by about $4.50.

If it takes two weeks for the move to happen, then the .90 delta option will lose less value to time decay, because its theta is lower than the .50 delta option.

According to TOS, the deeper ITM options have a higher theta value than the OTM options. Am I missing something?

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  #27 (permalink)
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vitrader View Post
According to TOS, the deeper ITM options have a higher theta value than the OTM options. Am I missing something?

The difference in theta seems negligible across the range of available strikes as compared to the differences in delta. As I look at the Aug1 weeklies (33 days out) the ATM strike has a theta of -.05 while the .90 delta 185 strike has a theta of -.04. The difference in theta is so negligible, that it seems to me it really shouldn't be a factor if you are looking to be long the call.

While theta is related to time decay, it is not, however, the only factor related to the extrinsic value of the option. Volatility and cost of money are two others. These combine to give you your extrinsic value.

The extrinsic value on a Aug1 185 call is 65 cents. On the 207 call, it is $3.89. If your bullish play is to buy the atm call, you need a $4.00 move just to break even. With the 90 delta call, you break even with just a $0.72 move.

In this game, you are either selling premium or buying premium. There is a reason that 90% of options sold expire worthless. If you want to be on the winning side of the trade, I would avoid buying the premium unless volatility is low and you anticipate an explosive move. Otherwise, you are better selling premium and letting someone else watch their option value go to 0. That's why I'd rather sell a put spread if I were bullish the market. Defined risk, with someone else paying me the premium. Granted, the potential gain is capped, but really, how much do you think the SPY will climb in the next 30 days anyhow?

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  #28 (permalink)
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coolway View Post
The difference in theta seems negligible across the range of available strikes as compared to the differences in delta. As I look at the Aug1 weeklies (33 days out) the ATM strike has a theta of -.05 while the .90 delta 185 strike has a theta of -.04. The difference in theta is so negligible, that it seems to me it really shouldn't be a factor if you are looking to be long the call.

While theta is related to time decay, it is not, however, the only factor related to the extrinsic value of the option. Volatility and cost of money are two others. These combine to give you your extrinsic value.

The extrinsic value on a Aug1 185 call is 65 cents. On the 207 call, it is $3.89. If your bullish play is to buy the atm call, you need a $4.00 move just to break even. With the 90 delta call, you break even with just a $0.72 move.

In this game, you are either selling premium or buying premium. There is a reason that 90% of options sold expire worthless. If you want to be on the winning side of the trade, I would avoid buying the premium unless volatility is low and you anticipate an explosive move. Otherwise, you are better selling premium and letting someone else watch their option value go to 0. That's why I'd rather sell a put spread if I were bullish the market. Defined risk, with someone else paying me the premium. Granted, the potential gain is capped, but really, how much do you think the SPY will climb in the next 30 days anyhow?

Odd. I am seeing $0.10 for the 185 call and .08 for the ATM call (52 delta). .02 is a big difference.

I agree with you about the theta decay and I know what you're saying about the break even calculations, but that's all assuming you hold the option until expiration. Most are bought and sold before expiration so it all depends on what you're trying to do.

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