8 ms·
> So you must always factor in the amount of time before a predicted crash: the longer it takes the more money you lose. I think the idea is, as a put buyer (m
by 0hijinks 11mo ago
> So you must always factor in the amount of time before a predicted crash: the longer it takes the more money you lose.
I think the idea is, as a put buyer (market taker), this has already been baked into the option premium. The only "maintenance cost" in the sense of a cost that adds to an open position is from interest on margin loans.
There would be a maintenance cost from rolling the position into a later expiry, but I think the impression is that this is a precise single bet.
EDIT: You're spot on about opening a position being a sort of cost too, due to missing out on risk-free returns. This is especially important for hedging. Less so for a directional bet.
- dragontamer 11mo agoTheta changes with time. If you want to minimize loss of time value, you buy 2 year LEAPs, and then as their 1-year approaches, you sell the LEAPs and roll them back into 2-year LEAPs. Theta rapidly changes as you grow closer to expiration. No one should be buying and holding just one option. Anyone who understands Black Scholes will be selling/buying and exchanging options as time goes on. ------- Buying puts is a bull-bet on Volatility and bear-trade on the underlying stock, while losing Theta (largely based on expectation date. Longer means less Theta decay). Selling calls is a bear bet on volatility, bear bet on underlying while gaining Theta in value each day. And then there are the many combination trades that are available. In any case, I don't think any sophisticated trader does the strategy you are assuming here. The sophisticated strategies involve selling and renewing your options as time moves forward / and or the stock price changes (to keep Delta withing appropriate levels).