The seller of a time spread buys the nearer month option and sells the outer-month option in a one to one ratio.
In order to profit from the sale of the time spread, the seller is looking basically for two things.
First is a decrease in implied volatility. As volatility decreases, the out-month option (which the seller [...]
When vertical spreads are mentioned, they quite often come with monikers such as ‘bull’ and ‘bear’. This lends most to think of vertical spreads as directional plays which is true. However, vertical spreads can be used to take advantage of two other potential trading opportunities – time decay and volatility movement.
If you are looking for [...]
When purchasing a time spread, the investor should pay attention to not only the movement of the stock price, but also the movement of volatility. It plays a very large roll in the price of a time spread, which is an excellent way to take advantage of anticipated volatility movements in a hedged fashion.
Option Volatility
Since [...]
Spread traders must understand how to properly calculate accurate volatility. In order to get accurate volatility levels, you must first determine a base volatility for the two options involved in the spread. Getting a base volatility must be done because different volatilities in different months cannot and do not get weighted evenly mathematically.
Since they are [...]
Time spreads can be a profitable investment strategy if you understand the concept of time decay. A time spread is designed to take advantage of the fact that an options decay curve is non-linear, that is, an option’s value does not decay evenly over time. As an option gets closer to expiration, its rate of [...]
I am sure many of you have heard of a sophisticated sounding strategy called the Butterfly. For some reason, it seems to be the darling strategy of many of those ‘teach-you in five hours’ type option companies. They publicize the ‘mystical magical Butterfly’ and the ’sophisticated Condor’ as if they were going to unlock the [...]
An at-the-money option has both advantages and disadvantages over stock and in-the-money options. First, the at-the-money option will be cheaper then both the stock and the in-the-money option. So there is less capital requirement and less total risk.
Remember, when buying an option, you can only lose what you spend. The problem is the amount of [...]
In options trading, there are some basic lessons that are the backbone of many other successful options trading strategies. How to engage in spread trading in options trading to enhance potential gains is one of these lessons.
Spread trading is a foundational tool that you should have in your options trading toolkit. It will [...]
Most trading literature on option strategies tend to lean towards mathematical formulas to define the construction of a spread. Guy Cohen has chosen to use pictorial logic, even with the Greeks unique to a particular strategy, to piece together the legs of a spread with diagrams.Diagrams that connect with each other are a much more [...]