How to trade SPY options? Need some help! - futures io
futures io futures trading



How to trade SPY options? Need some help!


Discussion in Options

Updated
      Top Posters
    1. looks_one dave01 with 6 posts (0 thanks)
    2. looks_two coolway with 5 posts (1 thanks)
    3. looks_3 00Frenchy00 with 4 posts (1 thanks)
    4. looks_4 vitrader with 4 posts (0 thanks)
      Best Posters
    1. looks_one ACstudio with 1 thanks per post
    2. looks_two tzhang042 with 1 thanks per post
    3. looks_3 00Frenchy00 with 0.3 thanks per post
    4. looks_4 coolway with 0.2 thanks per post
    1. trending_up 5,671 views
    2. thumb_up 6 thanks given
    3. group 12 followers
    1. forum 27 posts
    2. attach_file 1 attachments




Welcome to futures io: the largest futures trading community on the planet, with well over 125,000 members
  • Genuine reviews from real traders, not fake reviews from stealth vendors
  • Quality education from leading professional traders
  • We are a friendly, helpful, and positive community
  • We do not tolerate rude behavior, trolling, or vendors advertising in posts
  • We are here to help, just let us know what you need
You'll need to register in order to view the content of the threads and start contributing to our community.  It's free and simple.

-- Big Mike, Site Administrator

(If you already have an account, login at the top of the page)

 
Search this Thread
 

How to trade SPY options? Need some help!

(login for full post details)
  #1 (permalink)
Brussels, Belgium
 
 
Posts: 7 since Jan 2015
Thanks: 1 given, 3 received

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.

Reply With Quote

Can you help answer these questions
from other members on futures io?
COTbase for quant trading?
Elite Algorithmic NinjaTrader Trading
Where can I find Cost to Trade and Book Depth info?
Emini and Emicro Index
Volume Profile Indicator for Ninja Script in NT8
NinjaTrader
How is the range of strike prices determined?
Options
Help Needed: TOS Options Chain IV & IMPL MOVE Calcul …
ThinkOrSwim
 
Best Threads (Most Thanked)
in the last 7 days on futures io
Battlestations: Show us your trading desks!
124 thanks
Big Mike in Ecuador
61 thanks
Want your NinjaTrader indicator created, free?
28 thanks
If you needed one-on-one help with any trading issue, ho …
26 thanks
Selling Options on Futures?
21 thanks
 
(login for full post details)
  #3 (permalink)
Site Moderator
 
 
sam028's Avatar
 
Posts: 3,665 since Jun 2009
Thanks: 3,787 given, 4,494 received


There are a lot of different choices, just don't buy an option which will expire soon.
The Feb 20th 205 (or 210) Call for example:


Success requires no deodorant! (Sun Tzu)
Follow me on Twitter Reply With Quote
 
(login for full post details)
  #4 (permalink)
Sydney, New South Wales, Australia
 
 
Posts: 2 since Feb 2015
Thanks: 11 given, 0 received

I am new to options as well, I have traded shares & CFD's for quite a while (and been caught with a lot of useless and expensive advice over the years). I am researching as much info as I can about options and learning how to determine the "best" strike and expiry to sell. Firstly determining the direction and then the strike taking into consideration my risk as well as how much I am prepared to own those shares or not.

Reply With Quote
 
(login for full post details)
  #5 (permalink)
Nashville TN/USA
 
 
Posts: 35 since Nov 2014
Thanks: 0 given, 32 received

Taking a shot at both questions here. As for "best" anything whether it be returns or strike selection it is important to understand that options are priced around probabilities.

When you are trading something like SPY options you are trading in probably one of the most liquid and efficiently priced markets in the world. The prices are perfectly priced. Given time the probabilities play out exactly as they should.

The computations used to calculate these probabilities involve time and volatility. There will be no inherent edge for one strike over another if the liquidity is the same.

Strike selection really comes down to whatever you want to do since you can take profits anytime you want. You can select strike based on how much you are willing to risk. How long you want to be in the trade. Are you buying premium or selling it, is Implied Volatility Rank high or low? Are you collecting Theta decay or looking for Volatility contraction or expansion? Do you want more Gamma risk...or less? etc....

It's a big question but once you understand the mechanics you will have an answer for whichever environment or goal.

Reply With Quote
The following user says Thank You to ACstudio for this post:
 
(login for full post details)
  #6 (permalink)
New York City, NY
 
 
Posts: 3 since Mar 2015
Thanks: 0 given, 1 received

In your scenario, you're best return will be buying a 30 day option and trading a vertical spread.
Buy the 205 Call's to get the upside, but at the same time sell the 210 Call's against it to create a vertical spread.
This will give you upside ONLY up to 210, but for doing so, you receive premium to offset the cost of your 205 Call's and your only downside to this is if SPY goes above 210 before the 30 days are up, your gains will be capped.
Net Net, you lower your initial cost which lower's your max risk, lower's your breakeven price and increases your probability of profit.







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.


Reply With Quote
The following 2 users say Thank You to tzhang042 for this post:
 
(login for full post details)
  #7 (permalink)
Salt Lake City, Utah
 
 
Posts: 11 since Mar 2015
Thanks: 2 given, 0 received

Determining which expiry to sell is really tough for me. I've been given a lot of advice, but usually found it coming off a little skeptical misguided, even. I'm going to go out on a limb here and say that there really is no best for very long and with all the fluctuation, you just have to be able to have a certain insight.

Reply With Quote
 
(login for full post details)
  #8 (permalink)
New York City, NY
 
 
Posts: 3 since Mar 2015
Thanks: 0 given, 1 received

Well, actually there is a fairly simple math solution to all this.
I'm not familiar with TradeStation, but I'm sure they have tools to help you achieve a similar thing.
It's all about Probabilities. If your target is 210 on SPY, and it's currently at 205. Most platforms have a way for you to calculate probability of hitting 210 by a certain date. You can pick your expiry based on that statistic alone.
If you pick an expiry where there is a 10% probability of hitting 210, that's probably too soon. If you go out a few expires and notice the probability is 35%, you may have gone out too far.

The idea is to stay consistent by using the probabilities to always find an expiry that suits your time frame.

Reply With Quote
 
(login for full post details)
  #9 (permalink)
Nashville TN/USA
 
 
Posts: 35 since Nov 2014
Thanks: 0 given, 32 received


Jaymes Porter View Post
Determining which expiry to sell is really tough for me. I've been given a lot of advice, but usually found it coming off a little skeptical misguided, even. I'm going to go out on a limb here and say that there really is no best for very long and with all the fluctuation, you just have to be able to have a certain insight.

The period between 45 and 15 days to expiration has the most rapid Theta decay in the Theta Decay Curve. And therefore will yield the highest return on the capital you are tying up when selling premium.



Google it....no special insight needed.

Reply With Quote
The following user says Thank You to ACstudio for this post:
 
(login for full post details)
  #10 (permalink)
Salt Lake City, Utah
 
 
Posts: 11 since Mar 2015
Thanks: 2 given, 0 received



ACstudio View Post
The period between 45 and 15 days to expiration has the most rapid Theta decay in the Theta Decay Curve. And therefore will yield the highest return on the capital you are tying up when selling premium.

Google it....no special insight needed.

Yeah, fair enough.

Reply With Quote
 
(login for full post details)
  #11 (permalink)
Wichita Kansas/USA
 
 
Posts: 8 since Apr 2015
Thanks: 0 given, 1 received

I love selling option premium for income, don't think there is an easier way to trade that allows you to be wrong about time and or direction and still end up with a profitable trade. I like to trade verticals and or iron condors on the SPY, SPX, IWM, RUT with strike prices that are 1 standard deviation out of the money (as close to 85% Probability Out of the Money) with $5.00 wide strikes with 30 to 45 days to expiration and once I've put on a trade, I manage them by buying them back at 25 to 50 percent profit of my original credit if it's a winner and if it's a loser I'll either close the position for a loss at 50% of initial credit I received and move on to the next trade or if I'm 2 weeks or less from expiration and the strike I sold is being tested I'll roll the untested side up or down to the tested strike price for more credit to cut my loss / cost basis and maybe out to the next month for duration if my directional bias or trade assumption hasn't changed.
Example = SPY currently trading at 207.28
Trade Setup =
Sell to open (10) contracts of the MAY 15 SPY 214/219/195/190 Iron Condor for $1.00 credit
Risking $5,000 to make $1,000 (Possible 20% profit) in 37 days
As soon as it's filled I place a GTC order to buy back the trade at .50 credit (50% profit) and if it's a winner I look to make a new trade and I also place a mental stop loss to close the position at a 50% loss of the amount of credit I received on the trade if it immediately trades against me within the first 2 weeks. I monitor the trade daily. Once I've been in the trade longer than 2 weeks theta decay is working in my favor and if the trade violates one of the strikes I sold, I'll usually roll the untested winning side to the tested strike price for more credit / duration depends on how the market is reacting at the time, like is it moving steady or is it crashing. Markets usually continually melt up but crash down. I usually give myself more downside room than upside like in the above example.

How do you trade? Let's bounce trade ideas off of each other........I'm always looking for a better way to trade!!!


Reply With Quote
The following user says Thank You to 00Frenchy00 for this post:
 
(login for full post details)
  #12 (permalink)
College Station, TX
 
 
Posts: 7 since Feb 2015
Thanks: 5 given, 1 received

I've been selling iron condors further out, about ninety days, with the goal of getting out after a couple of weeks or so and capturing some theta decay. I place my short positions equidistant from atm, with the short call having a delta of about .07-.10. This doesn't give me a lot of depth, but plenty of width.

I don't care for having the wings on my condors too close, as inevitably one side or the other (or both!) get threatened. That's why I'm going further and wider.

I'm curious about how it works for you with rolling the profitable side up. Using your example above, say that the market rallies toward your 214 strike; Do you buy back the 195/190 and sell at 214/109? Or something lower?

What do you do then when the market falls back to your newly moved strike?

Reply With Quote
 
(login for full post details)
  #13 (permalink)
Wichita Kansas/USA
 
 
Posts: 8 since Apr 2015
Thanks: 0 given, 1 received

If the stock rallies to my 214 strike, I'll immediately buy the puts back for .05 cent debit and then sell another put vertical to cut my cost basis for a smaller loss or hopefully a scratch. I would move the put vertical much closer to the tested 214 strike, such as 212/207 or 210/205 for additional credit wherever it makes the most sense and if the market is moving up incredibly fast I might also sell the 214 call for a loss and let the 219 call run / collecting some additional value to offset any losses. I'll most likely sell 2 or 3 times as many puts to offset the losses as well when I move them in closer to my tested side. And if there just isn't enough credit available for a good risk / reward I'll close the position all together for no more than a 50% loss on that trade and move on to the next trade. I don't chase losing trades if there isn't significant enough credit available to make it worthwhile because each time you make an adjustment you are just putting on more risk and if there isn't enough credit available to at least scratch the trade, I won't pursue it anyfurther. I'll just accept the loss and look for a new opportunity.

Reply With Quote
 
(login for full post details)
  #14 (permalink)
Wichita Kansas/USA
 
 
Posts: 8 since Apr 2015
Thanks: 0 given, 1 received


coolway View Post
I've been selling iron condors further out, about ninety days, with the goal of getting out after a couple of weeks or so and capturing some theta decay. I place my short positions equidistant from atm, with the short call having a delta of about .07-.10. This doesn't give me a lot of depth, but plenty of width.

I don't care for having the wings on my condors too close, as inevitably one side or the other (or both!) get threatened. That's why I'm going further and wider.

I'm curious about how it works for you with rolling the profitable side up. Using your example above, say that the market rallies toward your 214 strike; Do you buy back the 195/190 and sell at 214/109? Or something lower?

What do you do then when the market falls back to your newly moved strike?

Here's a study that shows results as to why you don't want your wing strikes to close to the strikes you sold. You will lose everytime per their study: https://www.tastytrade.com/tt/shows/market-measures/episodes/exiting-iron-condors-01-02-2015?locale=en-US

Main Takeaways from their study video: "We have recently found that closing an undefined risk trade when it is trading for over 2x the amount of credit that you received is a viable exit strategy. However, can this exit strategy be used for a defined risk spread as well, mainly an Iron Condor? Is there a way that we can structure these Iron Condors to make the strategy more effective?

Today, Tom Sosnoff and Tony Battista test closing an Iron Condor when it has reached a 2x credit received loss. First, they look at a 25 point wide Iron Condor in SPX. They test managing the trades at 50% of max profit, a loss of 2x the credit received, 50% of max profit or 2x the credit received or holding the trade to expiration. They find out that none of the strategies were profitable but by combining managing the winners and closing the losers at 2x, you had the lowest amount of losses.

Next, the guys take this one step further and look at 50 point wide Iron Condors. This strategy mirrors a strangle more closely. They find that when using at the same exit, the wider Iron Condors see the most profit when managing at 50% and closing when the loss is at 2x the credit. This reinforces that this strategy should be used for undefined risk trades and those defined risk strategies that attempt to mirror naked options!"

Reply With Quote
 
(login for full post details)
  #15 (permalink)
College Station, TX
 
 
Posts: 7 since Feb 2015
Thanks: 5 given, 1 received


00Frenchy00 View Post
Here's a study that shows results as to why you don't want your wing strikes to close to the strikes you sold. You will lose everytime per their study...

I don't follow these guys, so I may be missing something about their trading methodology. Seems to me, though, that unless you have a crazy account to trade, then you've got no business putting on trades with undefined risk. That's why you won't see me selling any naked straddles.

That being said, I see their point regarding managing winners/losers. That's ultimately what we're in business for, right? However, their premise is based on either (a) holding a losing condor all the way to expiration, or (b) exiting the trade once losses are 2x the cost of the credit received. Anyone trading condors using those parameters deserves to have their account wiped out.

Once your short strike is threatened, roll it or quit it. To continue to hold beyond that point is ludicrous. If theta has been your friend, and IV hasn't dropped out, there's still a good chance of making money on the trade. If you do lose money, it's likely that IV has moved against you but you should still have nowhere near 2x the credit in losses.

If you listen through the entire presentation, Tom even hints at this, as he suggests they need to re-run the studies taking volatility into account. He also notes that the study was run over a period when volatility was low, making Iron Condors less likely to be profitable. While he's re-running his analysis, I'd suggest he add a study looking at the effect of exiting the condor near (and inside of) the short strikes. Now THAT would be a useful study.

Reply With Quote
The following user says Thank You to coolway for this post:
 
(login for full post details)
  #16 (permalink)
Salt Lake City, UT/USA
 
 
Posts: 10 since Mar 2015
Thanks: 0 given, 11 received

You might be interested in some of my iron condor backtest results posted on my blog.

After a pretty lousy 2013 trading an uneven, heavily hedged version of an iron condor on the RUT, I thought I'd look into how a plain vanilla iron condor would perform. I ran automated backtests on iron condors on the RUT, SPX, and NDX (using data from IVolatility from January 2007 through the date of my blog postings. I simply tested putting them on at a specified days to expiration (DTE), and taking them off at 8 DTE, with no management...a "no touch" trade.

I tested the iron condor at 80, 66, 52, 38, 31, and 24 DTE, using short strikes at 8 delta, 12 delta, 16 delta, and 20 delta...24 test runs in all per underlying (somewhere around 85 trades per run). On the RUT, the 66 DTE equity curves seem to look the best, but there are some big drawdowns because these were "no touch" trades. Even with the big drawdowns, most of the DTE variations have equity curves that move from the lower left to the upper right.

Since I'm new here, I can't post links, but you should be able to see my blog by clicking my name, or by sending me a pm.

Dave

Reply With Quote
 
(login for full post details)
  #17 (permalink)
Wichita Kansas/USA
 
 
Posts: 8 since Apr 2015
Thanks: 0 given, 1 received


dave01 View Post
You might be interested in some of my iron condor backtest results posted on my blog.

After a pretty lousy 2013 trading an uneven, heavily hedged version of an iron condor on the RUT, I thought I'd look into how a plain vanilla iron condor would perform. I ran automated backtests on iron condors on the RUT, SPX, and NDX (using data from IVolatility from January 2007 through the date of my blog postings. I simply tested putting them on at a specified days to expiration (DTE), and taking them off at 8 DTE, with no management...a "no touch" trade.

I tested the iron condor at 80, 66, 52, 38, 31, and 24 DTE, using short strikes at 8 delta, 12 delta, 16 delta, and 20 delta...24 test runs in all per underlying (somewhere around 85 trades per run). On the RUT, the 66 DTE equity curves seem to look the best, but there are some big drawdowns because these were "no touch" trades. Even with the big drawdowns, most of the DTE variations have equity curves that move from the lower left to the upper right.

Since I'm new here, I can't post links, but you should be able to see my blog by clicking my name, or by sending me a pm.

Dave

So after all that back testing, what is your conclusion? Does The Iron Condor Options Strategy Really Work?
What is the most profitable way to trade them? My conclusion is as follows:

Set it and forget it strategy:

Sell Premium / Iron Condors:

45-56 DTE (Days to Expiration) and without an earnings announcement in the near term.

IV Rank above 50% if its a stock, collecting at least 19.8% of the expected move in that respective time frame, without an earnings announcement in the near term
IV Rank above 35% if it's an ETF, collecting at least 19.8% of the expected move in that respective time frame, without an earnings announcement in the near term

Selling the 1-STD (Standard Deviation) OTM (Out the Money) Put and Call Strikes (84% OTM on both sides)

Buying the further out 2-STD Put and Call Strikes

Place a GTC (Good till cancel) OCO (one cancels the other) Limit Order where I buy it back if it gets to 50% of max profit.

Place a GTC (Good till cancel) OCO (one cancels the other) Stop Order where I buy it back if it gets to double what I received in credit or collected.

Let the probabilities work themselves out and "May The Odds Ever Be In Your Favor"


Reply With Quote
 
(login for full post details)
  #18 (permalink)
Salt Lake City, UT/USA
 
 
Posts: 10 since Mar 2015
Thanks: 0 given, 11 received

00Frenchy00 -

I responded to your question asking for my conclusion. I spent about 30 minutes writing my response, cross checking my data to be sure I gave you a correct answer. I also provided my personal choice of DTE and delta for the RUT IC as well as the SPX ICs that seemed to work the best. Unfortunately my two responses (one RUT, and the other SPX) were both deleted as self-promotion. Not sure why.

Sorry,
Dave

Reply With Quote
 
(login for full post details)
  #19 (permalink)
Site Administrator
Swing Trader
Data Scientist & DevOps
Manta, Ecuador
 
Experience: Advanced
Platform: My own custom solution
Trading: Emini Futures
 
Big Mike's Avatar
 
Posts: 49,792 since Jun 2009
Thanks: 32,326 given, 97,624 received


dave01 View Post
both deleted as self-promotion. Not sure why.

Because they were self promotion.

Let me google that for you



Mike

We're here to help -- just ask

For the best trading education, watch our webinars
Searching for trading reviews? Review this list

Follow us on Twitter, YouTube, and Facebook

Support our community as an Elite Member:
https://futures.io/elite/
Follow me on Twitter Visit my futures io Trade Journal Reply With Quote
 
(login for full post details)
  #20 (permalink)
Salt Lake City, UT/USA
 
 
Posts: 10 since Mar 2015
Thanks: 0 given, 11 received

Mike -

I've done tens of thousands of options backtests and the results and background are huge. I only referred to my blog because I did not want to repeat myself. Also, I'm not selling anything and my blog is anonymous (I have a day job)...I'm not promoting anything, just freely sharing information. Not sure how that comes across as self promotion, but this is your blog and will follow your lead.

Dave

Reply With Quote
 
(login for full post details)
  #21 (permalink)
Site Administrator
Swing Trader
Data Scientist & DevOps
Manta, Ecuador
 
Experience: Advanced
Platform: My own custom solution
Trading: Emini Futures
 
Big Mike's Avatar
 
Posts: 49,792 since Jun 2009
Thanks: 32,326 given, 97,624 received


dave01 View Post
Mike -

I've done tens of thousands of options backtests and the results and background are huge. I only referred to my blog because I did not want to repeat myself. Also, I'm not selling anything and my blog is anonymous (I have a day job)...I'm not promoting anything, just freely sharing information. Not sure how that comes across as self promotion, but this is your blog and will follow your lead.

Dave

You are encouraged to share. You are not permitted to share only by proxy of your blog.

Mike

We're here to help -- just ask

For the best trading education, watch our webinars
Searching for trading reviews? Review this list

Follow us on Twitter, YouTube, and Facebook

Support our community as an Elite Member:
https://futures.io/elite/
Follow me on Twitter Visit my futures io Trade Journal Reply With Quote
 
(login for full post details)
  #22 (permalink)
New York, New York, United States
 
Experience: Beginner
Platform: TOS
Trading: Options
 
vitrader's Avatar
 
Posts: 53 since Jul 2015
Thanks: 13 given, 7 received


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.

Reply With Quote
 
(login for full post details)
  #23 (permalink)
College Station, TX
 
 
Posts: 7 since Feb 2015
Thanks: 5 given, 1 received

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.

Reply With Quote
 
(login for full post details)
  #24 (permalink)
New York, New York, United States
 
Experience: Beginner
Platform: TOS
Trading: Options
 
vitrader's Avatar
 
Posts: 53 since Jul 2015
Thanks: 13 given, 7 received


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?

Reply With Quote
 
(login for full post details)
  #25 (permalink)
College Station, TX
 
 
Posts: 7 since Feb 2015
Thanks: 5 given, 1 received


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.

Reply With Quote
 
(login for full post details)
  #26 (permalink)
New York, New York, United States
 
Experience: Beginner
Platform: TOS
Trading: Options
 
vitrader's Avatar
 
Posts: 53 since Jul 2015
Thanks: 13 given, 7 received


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?

Reply With Quote
 
(login for full post details)
  #27 (permalink)
College Station, TX
 
 
Posts: 7 since Feb 2015
Thanks: 5 given, 1 received


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?

Reply With Quote
 
(login for full post details)
  #28 (permalink)
New York, New York, United States
 
Experience: Beginner
Platform: TOS
Trading: Options
 
vitrader's Avatar
 
Posts: 53 since Jul 2015
Thanks: 13 given, 7 received


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.

Reply With Quote


futures io Trading Community Traders Hideout Options > How to trade SPY options? Need some help!


Last Updated on July 6, 2015


Upcoming Webinars and Events
 

NinjaTrader Indicator Challenge!

Ongoing
 

Battlestations! Show us your trading desk - $1,500 in prizes!

March
 

Importance of Finding Your Own Way w/Adam Grimes

Elite only
 

Journal Challenge w/Jigsaw

April
     



Copyright © 2021 by futures io, s.a., Av Ricardo J. Alfaro, Century Tower, Panama, +507 833-9432, info@futures.io
All information is for educational use only and is not investment advice.
There is a substantial risk of loss in trading commodity futures, stocks, options and foreign exchange products. Past performance is not indicative of future results.
no new posts