In this article from our archives, we delve into the intricacies of option decay, focusing on the differences in how in-the-money (ITM), at-the-money (ATM), and out-of-the-money (OTM) options lose value over time. Recognizing these decay rates is crucial for traders to make informed decisions and develop effective strategies. Here are the key highlights:
Key Points
Decay Rates:
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We all know there are risks to 0DTE trading – mostly the swift time decay, changing delta and gamma, and potentially violent price moves by the underlying. But serious option traders are not deterred by those things; they can avoid most of them by merely paying attention. It then becomes a matter of how much time do you want to devote to a daily trading strategy. But this week, I read about a different kind of risk – one that I was not aware of, but which is apparently very real. To give credit where it’s due, the following article is based on this article by Cabot Wealth.
Just a week ago, $SPX had broken down below support at 5260, and it seemed like the bears might be flexing their muscles. But it was a weak decline, which abruptly turned around on May 31st. $SPX quickly reached new all-time closing and intraday highs above 5340, and has been able to hold the new highs for two consecutive days. Thus, the $SPX chart is bullish, and that calls for a "core" bullish stance.
Back in 2014, we published an article entitled “Sell In May and Go Away...or don’t.” At this time, we’re going to update the data in that article and discuss what it means. It was in the double issue, TOS Volume 23, Nos. 9 & 10, published on May 23, 2014.
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For quite some time the $SPX chart has been able to rely on support at 5050. The market traded in an area between 5050 and 5180 for nearly a month from mid-February through mid-March. But now that 5050 level has been breached, and selling has intensified. The fact that $SPX was trying to hold that 5050 level for several days means that it has now become resistance. There are other resistance levels at 5150 and 5260, the all-time highs.
