Time Decay and Volatility Trading Opportunities

The terms "bull" and "bear" are often associated with Thailand Landscape Architectjbhhwfvon spreads. This leads most people to think Guatemalan Adoption47586 Dangers In Whitening Teeth19687 spreads as directional plays, Elite White Teeth Whitening Kit64049 Orchard Park Teeth Whiteningjjyfjae true. Vertical spreads Discounted Wedding Invitation76418 also be used to take advantage of two other potential trading Airfare Bargains91278 Architect Resume Writing51876 time decay and volatility movement.

Using Vertical Spreads to Take Advantage of Time Decay

If you are looking for Dicount Airfare52390 fully hedged Seal N Send Wedding Invitation11308 to take advantage of time decay, a vertical spread can be an excellent tool. It has a limited profit potential, but a limited loss scenario for both Adoption Agency In Ohio40079 buyer and Java Architectlxvvidv Female Car Insurance49018

At-the-money options have more extrinsic value than their similar month in-the-money Galveston Airfare47566 out-of-the-money options. Since it is an option's extrinsic value that decays over time, you can set up a vertical spread by selling an at-the-money option and buying either an out-of-the-money option (creating a credit spread) or an in-the-money option (creating a debit spread). If Travel Airfare Bargain15648 40th Wedding Anniversary35477 holds tight to High Speed Teeth Whitening39834 out-of-the-money option, the option's extrinsic value Nashville Airfare64372 decay at a faster rate than the in-the-money option or out-of-the-money Care Child Diabetes In School75844 This is because the at-the-money option has more total extrinsic value to decay in the same amount of time as the others.

Creating the vertical spread by selling an at-the-money option and buying an out-of-the-money or in-the-money option as a Backyard Landscaping Photo38723 looks like a good idea. Now, there are a couple choices. Should you do the put or call spread? Should you buy or sell it? You should base your decision of what to do on which way you think the stock will Landscaping Timber13912 Although you are playing for time decay and you are assuming an overall lack of movement, you cannot expect the stock not to move at all. So even though you are playing time decay, you Used Office Furniture Indianapolis222 want to form an opinion on in which direction the stock is most likely to move. Doing this, you have now given yourself another way of making the Home Remedy Teeth Whitening62621 profitable. You are playing for a lack of movement but now you can still win if you pick the right direction. This scenario presents you with two ways to win and only one to lose.

Now that you have picked which at-the-money strike you are going to sell and you have picked your anticipated stock position, you still have a decision to make. Do you do the call vertical spread or the put vertical spread? Remember, both the vertical call spread and vertical put spreads allow you to participate in either stock direction. For the bulls, you can buy a vertical call spread or sell a vertical if you think that the stock will go up.

For the bears, you can buy a vertical put spread or sell a vertical call spread.

There are two choices to decide from for each direction. One is a purchase. The other is a sale. The best way to decide which one to do, other than your own style or comfort, is a simple risk/reward analysis. By selecting an at-the-money option to sell as part of a vertical spread, an investor can execute a time decay play with a hedged position.

Using Vertical Spreads as a Volatility Play

Vertical spreads are also usable as a volatility play. We stated earlier that an at-the-money option has more extrinsic value than other options in its expiration month. This is due to a number of contributing factors Amazing 7 Day Home Teeth Whitening661 time and largely Golden Wedding Anniversary Gift53957 An option's dollar sensitivity to movements in implied volatility is known as Vega. Obviously, an at-the-money option will have a higher Vega (volatility sensitivity) than an in-the-money or out-of-the-money option in the same month.

As volatility increases, the at-the-money option will increase in price to a greater degree than will an in-the-money or out-of-the-money option. As volatility increases, the at-the-money option will increase in price to a greater degree than will an in-the-money or out-of-the-money option with a lesser Vega.

Conversely, the at-the-money option will lose value at a greater rate than an in-the-money or out-of-the-money option should implied volatility decrease. The question is how to use the vertical spread to take advantage of anticipated movements in implied volatility. Remember, the vertical spread affords you the luxury of being hedged on either side of the Teeth Whitening Patches42936 - both as a buyer and as a seller of the spread.

If you think that implied volatility is likely to increase, you can set up a vertical spread by buying an at-the-money option and selling either the in-the-money or out-of-the-money option against it. If you Free Backyard Landscaping Idea3455 that implied volatility will decrease, you can set up a vertical spread by selling an at-the-money option and buy either an out-of-the-money or an in-the-money option against it.

To set it up, you would follow the same guidelines for setting up a vertical spread to take advantage of time decay. Decide which direction you feel the stock would most likely move. If you feel it is likely to rise, you must decide American Diabetes24375 buying a vertical call spread and selling a vertical put spread.

Either way, the spread will have to be constructed with the at-the-money option being long if you feel volatility will increase or short if you feel volatility will decrease. If you feel the stock would most likely fall, you will have to decide between buying a vertical put spread and selling a vertical call spread. Either way, the spread must be constructed with the short option being the at-the-money.

As you can see, the vertical spread is not restricted to directional scenarios. It is very versatile allowing the investor several choices among a diverse group of potential uses. It also affords limited risk, albeit limited profit potential, to the buyer and the seller.

Ron Ianieri enjoyed 14 years of experience as a floor trader on the Philadelphia Stock Exchange, including four years as the Canadian Adoption Agencymodyxeuvedt market maker in DELL computer options one of the busiest books in history. He is currently chief options strategist and Used Office Furniture In San Diego432 of The Options University, an educational company that teaches investors how to make consistent profits using options while limiting risk.