Time decaying

columbus · #1 26th February 2010, 08:31 AM

Time decaying is talked a lot in case of Options but
we have similar phenomenon in case of Futures also.
Am I right?

AW10 · #2 26th February 2010, 04:15 PM

Columbus, IMO, futures have Cost of carry discounted in its price. This is equal to the risk free cost on cash equivalent value of futures for the remaining life of contract.
As daily risk free interest rate is so low (if risk free rate is 5% pre annum, then it turns out to be approx =5/200 = .0025 % per day.) which is not very significant value.
Infact we pay more then that as brokerage.

Besides this, the premium/discount of future above/below spot is mainly driven by sentiments rather then real theory/stats behind the futures pricing.

so in my view, there is Negligible to NO time value in futures price (from traders perspective). Time value in options is real juice of option trading and there is pently of it available at any moment.

These are just my views.. looking for some different opinions if they come.

Happy Trading

trader.trends · #3 26th February 2010, 05:19 PM

Quote:

Originally Posted by columbus

Time decaying is talked a lot in case of Options but
we have similar phenomenon in case of Futures also.
Am I right?

Columbus
Time decay is when the value of an asset decays with time. A car, TV etc bought today has lesser value next year whether used or not. The term depreciation is used when dealing with fixed assets. Whereas a plot of land increases in value with time (generally). As far as shares in a company are concerned, they can appreciate or depreciate with time as lots of other factors come into play.

When we come to futures and options time decay is there only for options and not futures. Assume Nifty spot at 4950 the futures may trade at a premium/discount of 10 points. The 4950Ce and PE will trade at around 130 each. As time passes and we end the series, suppose the spot after going all over the place ends at 4950 only. The futures end at 4950 too on expiry day. Whereas the options which had value of 130 each become zero even though the underlying has not moved a point. This is time decay.

In many sense people prefer to trade in futures to avoid time decay. In the last example, if they had expected NF to go to 5200 and bought at 4950, at the end of the series if they still hold the view of touching 5200 they can 'rollover' into the next month at no extra cost except the brokerage. The options buyers have no such choice. They have to pay the premium again and take a fresh position. Options sellers (like AW10

)mint their moolah because time decay is on their side.

columbus · #4 26th February 2010, 05:38 PM

Quote:

Originally Posted by trader.trends

Columbus
Time decay is when the value of an asset decays with time. A car, TV etc bought today has lesser value next year whether used or not. The term depreciation is used when dealing with fixed assets. Whereas a plot of land increases in value with time (generally). As far as shares in a company are concerned, they can appreciate or depreciate with time as lots of other factors come into play.

When we come to futures and options time decay is there only for options and not futures. Assume Nifty spot at 4950 the futures may trade at a premium/discount of 10 points. The 4950Ce and PE will trade at around 130 each. As time passes and we end the series, suppose the spot after going all over the place ends at 4950 only. The futures end at 4950 too on expiry day. Whereas the options which had value of 130 each become zero even though the underlying has not moved a point. This is time decay.

In many sense people prefer to trade in futures to avoid time decay. In the last example, if they had expected NF to go to 5200 and bought at 4950, at the end of the series if they still hold the view of touching 5200 they can 'rollover' into the next month at no extra cost except the brokerage. The options buyers have no such choice. They have to pay the premium again and take a fresh position. Options sellers (like AW10

)mint their moolah because time decay is on their side.

Hi trader.trends & AW10,

My knowledge in Options is quite LOW and I want to improve a bit
before I venture into them future.Thanks for your feedback.

AW10 · #5 26th February 2010, 06:04 PM

Welcome to the fascinating world of options, Columbus.
Start with right foundation and don't get lost in 100s of strategies out there.
You also might have to start think like a insurance company or casino house.
Warren Buffet knows it well how profitable insurance buss is and that's why he has so much holding in Insurance companies. His company is also in Put writing on huge amount of assets they own.. and generate regular income.

These are some of the hidden facts of WB that I have come across.. but most of the people think that he is just buy and hold person. To me he (or atleast his team) is smart option player as well.

Happy Trading

tradersky · #6 19th March 2010, 10:44 PM

time decay occurs only option and not futures.

sidd.band · #7 31st March 2010, 11:19 PM

Quote:

Originally Posted by AW10

Columbus, IMO, futures have Cost of carry discounted in its price. This is equal to the risk free cost on cash equivalent value of futures for the remaining life of contract.
As daily risk free interest rate is so low (if risk free rate is 5% pre annum, then it turns out to be approx =5/200 = .0025 % per day.) which is not very significant value.
Infact we pay more then that as brokerage.

Besides this, the premium/discount of future above/below spot is mainly driven by sentiments rather then real theory/stats behind the futures pricing.

so in my view, there is Negligible to NO time value in futures price (from traders perspective). Time value in options is real juice of option trading and there is pently of it available at any moment.

These are just my views.. looking for some different opinions if they come.

Happy Trading

Hi AW10 and all other Members,
I have one Practicle Question.
Why TataMotors, SesaGoa and such other counters are always in Discounts?
Can you please explain it w.r.t. 'Time Decaying' Theory?

AW10 · #8 6th April 2010, 04:17 PM

sidd.band, I assume you are talking about Futures of Tata Motors / Sesa Goa.
I doubt that their futures are always in discount to spot value.

Generally it happens when players are bearish about the stock and not willing to pay the premium over current spot price. So they put lower bid price to buy the futures and when future sellers also are not bullish on the stock so they are ready to sell even below current spot price.. and net result, we have futures trading below Spot.

But opposite case is also true when players are bullish about the stock, in that case, sellers quote price above spot and buyers also jump and grab that price cause they are bullish.. So futures lead the Spot.

It has nothing to do with timedecay but more to do with sentiment and perception.

Hope it answers your questions.
Happy Trading

sidd.band · #9 6th April 2010, 08:39 PM

HI AW10,

First of all thanks for your valuable reply.

I am obseving these two counters since last 6 Months.
Those are generally in discounts only,
even today SesaGoa was 6-8 Rs. in discount.
And about the TataMotors at times it was in 16Rs. in discount.

I agree theoritically the counter looks 'bearish'.
But actually there is no much correction in these counters.
Though there is much movement in it.

Just wondering Why these stocks are so much in discounts?

People (Investors) who have delivery of these stocks can take an Arbitrage opportunity in these counters.
As on expiry Future will be valued at Average closing of the spot price.

Thanks.

sidd.band · #10 6th April 2010, 08:55 PM

Quote:

Originally Posted by AW10

sidd.band, I assume you are talking about Futures of Tata Motors / Sesa Goa.
I doubt that their futures are always in discount to spot value.

Generally it happens when players are bearish about the stock and not willing to pay the premium over current spot price. So they put lower bid price to buy the futures and when future sellers also are not bullish on the stock so they are ready to sell even below current spot price.. and net result, we have futures trading below Spot.

But opposite case is also true when players are bullish about the stock, in that case, sellers quote price above spot and buyers also jump and grab that price cause they are bullish.. So futures lead the Spot.

It has nothing to do with timedecay but more to do with sentiment and perception.

Hope it answers your questions.
Happy Trading

HI AW10,

First of all thanks for your valuable reply.

I am obseving these two counters since last 6 Months.
Those are generally in discounts only,
even today SesaGoa was 6-8 Rs. in discount.
And about the TataMotors at times it was in 16Rs. in discount.

I agree theoritically the counter looks 'bearish'.
But actually there is no much correction in these counters.
Though there is much movement in it.

Just wondering Why these stocks are so much in discounts?
People (Investors) who have delivery of these stocks can take an Arbitrage opportunity in these counters.
As on expiry Future will be valued at Average closing of the spot price.

Thanks.

The Following 6 Users Say Thank You to AW10 For This Useful Post:
columbus (26th February 2010), DanPickUp (26th February 2010), jvblogger (26th February 2010), kvram (26th February 2010), ranj_2k (26th February 2010), TraderRavi (21st April 2010)

The Following 4 Users Say Thank You to trader.trends For This Useful Post:
AW10 (26th February 2010), columbus (26th February 2010), DanPickUp (26th February 2010), kvram (26th February 2010)

The Following User Says Thank You to columbus For This Useful Post:
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The Following 3 Users Say Thank You to AW10 For This Useful Post:
DanPickUp (26th February 2010), kvram (26th February 2010), sidd.band (6th April 2010)

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