Hi Bakul
I can throw some light on that subject even I am not involved in any trades in India. My home market is the CME ( Chicago Mercantile Exchange ).
When an option has several months remaining before expiration, time decay is relatively slow. As time goes by, the rate of time decay (the option's theta) increases. When the option has less than 30 days remaining, time decay goes into high gear. Calendar (time) spreads take advantage of this characteristic.
I guess, Capricorn trades such strategies in your home market. I am informed, that in Nifty options the open interest for next month options or even more far out of the month options is low and the bid ask spread is very big.
Having legs on low volume strike prices is dangerous, as you may are not able to trade this option exactly at the moment you need to trade it. In such situations you usually also will get the worst filled, in case the market maker has to take your order and he is also in no way interested to own such options. So he is going to price in his risk he takes at this moment and this price different to the fair price of the option, you will pay.
A few more thoughts from my side, before I step in to a time spread or any calendar spread.
- The market should be in a trading range, the narrower, the better. Any big moves up or down will hurt this position and may result in a loss.
- The options you sell should be overvalued relative to the options you buy. This will help to stack the odds in your favor.
- It helps if implied volatility is increasing. This will increase the time value premium of the options you purchase (which have more time remaining than the options you sell in a calendar spread).
- When you find a candidate for a calendar spread, make sure you identify the profit zone, that is, the price range which the underlying has to stay within for this strategy to be profitable. Also, look at what would happen to your position if implied volatility changes, and so on. This will help you to make sure you get into the best trades (and avoid the bad ones).
Take care
DanPickUp
I can throw some light on that subject even I am not involved in any trades in India. My home market is the CME ( Chicago Mercantile Exchange ).
When an option has several months remaining before expiration, time decay is relatively slow. As time goes by, the rate of time decay (the option's theta) increases. When the option has less than 30 days remaining, time decay goes into high gear. Calendar (time) spreads take advantage of this characteristic.
I guess, Capricorn trades such strategies in your home market. I am informed, that in Nifty options the open interest for next month options or even more far out of the month options is low and the bid ask spread is very big.
Having legs on low volume strike prices is dangerous, as you may are not able to trade this option exactly at the moment you need to trade it. In such situations you usually also will get the worst filled, in case the market maker has to take your order and he is also in no way interested to own such options. So he is going to price in his risk he takes at this moment and this price different to the fair price of the option, you will pay.
A few more thoughts from my side, before I step in to a time spread or any calendar spread.
- The market should be in a trading range, the narrower, the better. Any big moves up or down will hurt this position and may result in a loss.
- The options you sell should be overvalued relative to the options you buy. This will help to stack the odds in your favor.
- It helps if implied volatility is increasing. This will increase the time value premium of the options you purchase (which have more time remaining than the options you sell in a calendar spread).
- When you find a candidate for a calendar spread, make sure you identify the profit zone, that is, the price range which the underlying has to stay within for this strategy to be profitable. Also, look at what would happen to your position if implied volatility changes, and so on. This will help you to make sure you get into the best trades (and avoid the bad ones).
Take care
DanPickUp
