Second, the stock can move.
As stated before, a time spread is at its widest, most expensive point when it is at-the-money.
A movement away from the strike in either direction decreases the value of the spread.
So, as long as the stock moves in either direction away from the strike, the seller's position could be profitable provided that time decay does not outperform the stock movement.
Time, unfortunately, never works in favor of the time-spread seller.
The passage of time hurts the seller because the nearer month option (which the seller is long) naturally decays at a faster rate than does the out-month option (which the seller is short).
These differing decay rates cause the spread to expand and increase in value.
That obviously produces a loss for the time spread seller.
Time can neither be stopped nor turned back.
It only moves forward which always hurts the time spread seller.
No comments:
Post a Comment