BEFRIEND THE TREND Short-term Options Trading Thread Message Board

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Strategies & Market Trends : BEFRIEND THE TREND Short-term Options Trading Thread

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Jan 13 4:00 PM EST

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To: Dr. Stoxx who wrote (50)	1/28/2002 1:03:24 AM
From: Dan Duchardt	Read Replies (2) of 4058

TC, Unknown variables for me, however, are just how fast time value deteriorates; whether and how fast delta changes over time; and the whole liquidity problem (can one get stuck in a marketless contract?). Any insights from you -- or anyone else reading this -- would be greatly appreciated. All else being equal, time value erodes as the square root of the time remaining till expiration. Delta does change with time, but it is far more sensitive to price than time. For the short time frame and simple long calls or puts the only thing you probably need to worry about is a collapse of volatility that can happen when anticipated news finally hits. Volatility tends to be high in anticipation of news events, and that can inflate the options premiums. I do think you may be pushing your luck trading front month options in the last two weeks before expiration unless you are willing to abort trades in a few days when a stock just does not go in you favor, even if it has not gone against you. The best way I know of to get a good feel for the evolution of option pricing is to play around with a good analyzer program. The AOL.xls spreadsheet posted by TraderWithNoName comes from an analyzer from OptionStar. Another Excel based analyzer that I have used and prefer (perhaps only because I have used it more), as well as some online tools is available at hoadley.net No model can do a good job accounting for deviations from theoretical behavior, and I put bid/ask spreads in that category. They can eat you alive. A simple calculation that should always be done when going into an options trade is to estimate the necessary move in the underlying just to cover the bid/ask spread. In theory, that move is the bid/ask spread divided by the delta of the option, which is always greater than the bid/ask spread. If you don't expect a move substantially greater than that (at least three or four times as much), short term options trading is not an appropriate strategy. From what I have seen of your trading style, I don't see any reason why you cannot capture significantly greater moves. Dan

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