Manage your time value well at the beginning of September series

Beginning of a new series brings with it a lot of cues on continuity and a lot of time value in the options. Now, while trading directions with 3-4 weeks balance for expiry, we need to break down the trades with respect to time horizon of the view and device the option strategy accordingly.

1. For 0-1 Week

2. For 1-2 Weeks

3. For 2-3 Weeks (Up to Expiry)

Let us start with the immediate term i.e. 0-1 week. The time value (theta) decay during this period (while taking a trade for less than 1 week at the beginning of expiry) is fairly slow.

Without the daunting fear of theta decay, the strategy becomes simple. Just Buy Options, Buy at the money or ATM (strike close to the current market price of underlying) Call for the Bullish view and ATM Put for Bearish View.

Just one piece of advice, apply stop loss in terms of underlying price and time (ideally 2-4 trading sessions).

Now comes 1-2 weeks or positional view as it is commonly referred to as. Here, the first few days may not bring in any great damage in terms of theta decay on day-on-day basis, since the trade would be held over 1-2 weeks, the cumulative theta decay could hurt a little.

Answer lies in simple one to one funding. Sell a Higher Call/ Lower Put (of the target price) against a Buy position in ATM Call/ Put. Convert the single option trade into Spread. The P\L here gets defined with maximum profit being difference between strike minus Net Premium paid (Buy Option – Sell Option). And maximum loss is defined at Net Premium paid.

However, I would still have underlying price govern the exits. If the underlying price does not support the view, there would be no point in holding on to the position.

Last but not the least would be the medium-term view which is expected to materialize over the period of 2-3 weeks or even by the end of expiry.

Now, there are two different ways to trade this view that has worked for me at least. Considering the longevity of the view one would expect the magnitude of expected movement would be big.

1) If liquidity persists along the entire set of strikes, Buy ATM Call/ Put and Sell 2 Lots of the Higher Call/ Lower Put and Go even further and Buy even Higher Call/ Lower Put. Benefit would be the funding would be enough (due to double sell) and P/L would be defined due to equal Buy & Sell of Options.

Profit, in this case, would be limited to Strike difference minus net premium paid & loss would be limited to Net Premium Paid.

The only limitation of the strategy is if the targets are achieved before time there would be profits but just a fraction of the maximum achievable.

2) Other way to trade is Buy one Lot Higher Call/ Put typically 2 strikes closer to the current price vis-à-vis target and Sell one lot Higher Call/Put that corresponds to the target.

This is rather simple and in expensive. Here while the maximum profits may be lower than the first one, there would be possibility to make decent gain just in case the targets were to be achieved before time.

Thus make the most of the available Option strikes and choose the strategy that suits the longevity of the view.