We’ve mentioned before that our preference is to close out short option positions before the dynamics of expiration week have a chance to kick in. In a nutshell, while it’s true that theta declines more quickly as expiration looms, tempting option shorts to hold on as long as possible, it is also true that gamma rises more quickly closer to expiration, as shown below. There is no one right answer about how to trade expiration. But if…
Monday, December 1, 2008
Traders tend to pay a lot of attention to expiration week, and for good reason. There are also some post-expiration phenomena worth noticing: in particular, unsophisticated options sellers often allow their front-month contracts to expire before selling the next series. There’s an apocryphal story about a big SPX condor seller who always used to wait until the Monday morning after expiration to route his single monster trade for the month. But we’ll leave discussion of the disadvantages of that…
Thursday, August 28, 2008
Quick, somebody sell Tim Knight some option premium! There’s something wrong with the picture at left, but nothing wrong with these markets if you’ve been a premium seller for the past couple weeks. On the other hand, even deft swing traders are getting whiplashed around. Everyone is betting on a breakout or breakdown after the holiday, and they’re probably right. Until then, it pays to get paid to sit on your hands. To be fair, the phenomenon pictured here is…
Tuesday, August 12, 2008
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There are plenty of ways to put on option trades that have a neutral outlook: straddles, strangles, condors, etc. Whereas stock and futures traders are limited to whatever price action the market gives you, options let you take a view on implied volatility (vega), the passage of time (theta), and the rate of change of the rate of change of the option per unit move in the underlying (gamma). Okay, that last one isn’t so obvious, but the idea is…
Sunday, July 13, 2008
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The Striking Price column in this weekend’s Barron’s features John Marshall from Goldman, who suggests an “opportunity to buy volatility” in the S&P Materials sector via the tracking ETF (XLB). He makes the bearish case for XLB, arguing: 1) that the materials sector is particularly vulnerable to any slowdown in global growth, 2) that the ETF components include some less resilient names, and don’t feature the best of breed like POT and MOS, and 3) that hedge funds are…
Wednesday, January 7, 2009
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