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Time spreads are generally a good idea, but not solely because of the faster
erosion of the short. Your market view should be relatively neutral for the
near term to merit entering into a time spread. Also the short dated option you
are selling will have much more gamma than the longer dated option you hold.
Which means if you are wrong it will go up at a faster rate than your long. You
need to be well capitalized to do a time spread because you need to be prepared
to trade the cash if the short gets exercised as you would not exercise the long
( it would still have time premium and you would throw it away if you exercised
the long to deliver the short) so you need to be prepared to manage short
exercise. This is more manageable in markets where you can trade european
options, as in futures, but then the overall spread becomes a bit less
attractive because the early exercise premium is heavier in the short were it an
american option.
Bando57@xxxxxxx wrote:
> I have a question for any option traders to offer an opinion on.
>
> What do people on here think of Time Spreads.
>
> Here is the formula
>
> 4 x time = only 2 x dollar value
>
> in other words an option with 24 months worth of time is usually only worth
> twice as much as one that is six months out or less. Therefore you are
> getting all that extra time at half the price is the thinking.
>
> What my learned friend is doing and bragging about:
>
> is that in futures he is doing the following:
>
> The June 2002 contract of Gold is at around 290 so he buys a June 2002 call
> at the 290 strike price for say 21 bucks.
>
> He then goes to the November 2000 contract price of gold which is around 270
> so he sells a November 2000 270 call for five bucks..taking in the premium,
>
> His plan is every month let the front month call he sells expire
> worthless..keeping the premium and setting up another one in the next
> month...and so on and so on...using the June 2002 call as insurance.
>
> What do the option traders on here think about this?
>
> Rick
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