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marktheshark

Positive Theta AND Positive Gamma

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I recently opened an ITM put calendar spread. I am long a few more puts than I am short, creating negative delta. Of course, I am positive theta. However, To my surprise I am also positive gamma. Essentially, I have no risk to the downside and, if the underlying moves up, the positive theta should cover me. I am positive vega so there is volatility risk if the underlying moves up, but I believe this is manageable in this market environment.

 

Has anyone else experienced this? Almost all gurus out there profess that if theta is positive, gamma must be negative. Obviously either they are missing something or I am.

 

Any comments would be appreciated.

 

Thanks

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I recently opened an ITM put calendar spread. I am long a few more puts than I am short, creating negative delta. Of course, I am positive theta. However, To my surprise I am also positive gamma. Essentially, I have no risk to the downside and, if the underlying moves up, the positive theta should cover me. I am positive vega so there is volatility risk if the underlying moves up, but I believe this is manageable in this market environment.

 

Has anyone else experienced this? Almost all gurus out there profess that if theta is positive, gamma must be negative. Obviously either they are missing something or I am.

 

Any comments would be appreciated.

 

Thanks

 

do you have a risk profile?

 

ITM? slightly bearish is ok... but it all depends...

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I recently opened an ITM put calendar spread. I am long a few more puts than I am short, creating negative delta. Of course, I am positive theta. However, To my surprise I am also positive gamma. Essentially, I have no risk to the downside and, if the underlying moves up, the positive theta should cover me. I am positive vega so there is volatility risk if the underlying moves up, but I believe this is manageable in this market environment.

 

Has anyone else experienced this? Almost all gurus out there profess that if theta is positive, gamma must be negative. Obviously either they are missing something or I am.

 

Any comments would be appreciated.

 

Thanks

 

working on the basis of the gurus - if theta is positive then you are receiving money each day, and hence your gamma is negative.....just for clarity.

ie you are short vol.

Which means there is some confusion - you say you are positive theta and positive gamma....is this from a theoretical addition of the individual greeks?

I would also say your vega and gamma mean very little to you unless you are trading the volatility either by actively continually hedging or looking for a move in volatility to unwind the position.

 

Given this - a lot will depend on the ratio of long to short puts, and what the prices are now of each option (there might be a skew), how far you are from expiry and how far the underlying current price is from options, as well as how far apart the option strikes are from each other . Plus - are you basing your Greeks off the theoretical prices, or the mark to market prices?

Basically you need a lot more information to assess this accurately, and maybe its just a matter of calculation iterations.

 

you can put ratios on whereby they work pretty well up until the expiry month in which case either the negative gamma kills you, or the theta costs you too much (assuming you are hedging) ---- too many scenarios, you need more information.

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Thank you for your observations and analysis. I agree I will need to see how this position develops and unwinds before drawing any solid conclusions. It is an actual live position, not just theory, but perhaps it is a fluke based on skewed prices or fills.

 

I do see that the gamma will eventally turn to negative as the near term shorts expire. I guess the goal will be, depending on market conditions, to hedge as this occurs or take profit from the positive theta and close.

 

mark

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I recently opened an ITM put calendar spread. I am long a few more puts than I am short, creating negative delta. Of course, I am positive theta. However, To my surprise I am also positive gamma. Essentially, I have no risk to the downside and, if the underlying moves up, the positive theta should cover me. I am positive vega so there is volatility risk if the underlying moves up, but I believe this is manageable in this market environment.

 

Has anyone else experienced this? Almost all gurus out there profess that if theta is positive, gamma must be negative. Obviously either they are missing something or I am.

 

Any comments would be appreciated.

 

Thanks

 

Like others said, need a bit more details. But the positive gamma is probably coming from the fact that you have more Long puts than short. How much more Long is something we don't know. Also its not clear why you say "if the underlying moves up, the positive theta should cover me". I feel there is something wrong with this statement. Since you have more long puts, my sense is that your risk is to the upside, and the graph turns down into negative territory if it moves up. So there must be risk on the upside. If you can include a risk graph, things will be clearer.

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this is your profile....underlying at 143 ??

 

DEC JAN

Strike Call Put Call Put

142 -1

146 3 -6 8

147

 

which basically means another way of looking at it....

 

DEC JAN

Strike Call Put Call Put

142 -1

146 -3 3 5

as the Dec 146 synthetic x 3 is like fully hedging the Jan Put making it a call.

147

 

If you are following this far.....and i have read your system right.

Hence if the instrument falls - delta is net negative

by 4 puts at the 146 strike, and one 146-142 put spread.

This is effectively hedged by the long 3 synthetic, meaning you have 1 put, and one put spread if it falls.

 

If it rallies, you have calls on the upside - assuming you dont close them out, and accept the underlying.

 

SEE the point of there are many ways of looking at it......

 

............

however getting back to the original post.....

you are receiving time decay - ie; positive theta and positive gamma.....how/why?

 

its becasue the time decay on the DEC is enough to be more than the time decay on the JANs, .....BUT the gamma does not kick in until it gets close to the 146 strike, in which case i can assure you the gamma will effectively be 0 or 1 along with the Delta on the Dec options near 146.

 

Dont be deceived by the greeks - you need to understand where your risk is...

Move the date forward to expiry in Jan.....move the price to 145.99 whats the position.

then move the price to 146.01 whats the position.

 

Again why options are a much missunderstood.

 

Remeber also what happens after expiry - do you roll, do you take the underlying if below the strikes you are short, are they cash settled.

If its cash settled - you will just be naked short 8 puts.

 

(assuming i have read your summary correctly) :)

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Thank you Siuya for your thorough analysis.

 

Of course, the risks associated with short options cannot be understated. The small amount of premium collected is paltry compared to the huge leverage working against them at an increasingly steep rate as expiration approaches.

 

An additional risk in this position is the positive vega. It loses money when volatility drops. In fact, in retrospect it should have been set with positive delta to offset any drop in volatility - an occurrence generally associated with a rise in price in this particular instrument.

 

That being said, as long as the risks are managed this appears to be a viable short-term position in a low volatility envorinment using European style options (exercise at expiration). Rolling or closing before the shorts expire would appear to be the proper follow up trade.

 

mark

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