What are the details for an option spread that benefits from time delay?
Answers
2183 points
ChaosNantuko answered one year ago …
An in the money vertical option spread will benefit from time decay.
An example is if the stock is trading at 100, and you buy the 90 call for 13$, and sell the 95 call for 9$. If the stock price doesn't move, then you'd end up buying the stock at 90, selling it at 95 for 5$ coming in. to establish the position, you paid 13 and got 9, for a net outflow of 4. net profit there is one dollar, all from time decay.
Covered calls and naked puts also benefit from time decay.
your selling a call, so time decay is profitable
Calendar spreads benefit from time decay.
you buy a call for next month, and sell the same strike this month. the time decay is larger for options with less time left, so overall, time decay is profitable, because the option you sold decays at a faster rate then the one you bought.
Diagonal spreads sometimes benefit from time decay.
this is when you buy a call for next month, and sell a different strike this month. Depending on the options chosen, the theta on the option this month will probably be higher then the one on the farther out month, and so you will also make money from time decay.
202 points
Lobo answered one year ago …
I think most every spread contains an element of having the time decay work for you, with the exception perhaps of vertical spreads with the same expiration date--even then there should be consideration of time decay. How much time is left to allow the stock price to reach the price levels of your vertical spread? There are as many methods and types of spreads as ... as chess moves. Generally, a covered call in the near month will lose value more quickly within 60 days, and loses more quickly the nearer expiration time approaches. So the long call holds its value and the spread increases and you win! You can do calendar spreads, vertical spreads, bull or bear spreads---all with multiple variations that may differ with that various stock "beta" and subjective price outlooks. In some spreads you might prefer volatility for quick trade in a favorable spread movement. Another spread might work with a solid, low volitility stock where your long call can be placed "way out there" with little movement. This might allow you to do covered calls each new month as the short call expires. I suggest the details of the spread types and method are as varied as there are individuals creating them. We all have different comfort or anxiety levels. Hey, the "details" are endless, but spreads are interesting...and usually profitable, with a little care and study. And it probably isn't as difficult to create a safe spread as I've just made it sound.
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