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0 points0hijinks6mo ago0 comments

> 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.

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dragontamer6mo ago

Theta 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.

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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).

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