Time decay is in focus for some options traders during this holiday-shortened week.
The amount of time before an option expires is one component in the price of an option: Falling time value, or decay, occurs from the first day an option trades, but accelerates as expiration nears.
In the case of July options, expiration will occur on the 20th of the month--meaning decay is rapidly accelerating right now. Traders lose almost two days to react to time decay because of the holiday-shortened week, raising the question of whether to unload July options before the market takes a break.
"I try not to be too absolute about holiday weeks and time premium decay," said Pete Stolcers, founder of Oneoption.com, a stock option research site for traders and institutions. "I let the market and the stock be my guide, and as long as there's good momentum in a good position, I would stay with the position."
But there's a flip-side as well, Stolcers said.
"It’s when you have dead wood that you need to look at exiting the position," he said. "Maybe you roll (out of the position), maybe you don’t roll, but if the stock has completely lost momentum, it might be time to step aside."
Following the first weekend of iPhone sales, Apple shares traded lower by less than one percent through the Monday session. Options traders, however, have been busy making a variety of maneuvers to capitalize on a drop in implied volatility following the frenzy, and continued to make bets that more upside may be ahead for the stock.
"The big trade appears to be to sell volatility where there’s plenty of two-sided activity in the July 120 straddles (sales of calls and puts today)", said Andrew Wilkinson, senior market analayst at Interactive Brokers.
A straddle is an options strategy where the investor holds a position in both a call and a put with the same strike price and expiration date.
Implied volatility is the relative value of an option and often rises ahead of anticpated news and tends to fall following confirmation of the news. Sales of straddles benefit the seller as implied volatility declines.
Bulls however, remain out in force in the Apple options universe, where two calls, which are bullish bets, have traded for each put today.
So bullish are some traders, that there is speculation today all the way to Apple January 200 calls, which is a bet that Apple will rise $80 and reach $200 or higher by expiration next January. That's seen a longshot bet since the delta on the January 200 options is less than 7%, meaning the market has assigned little chance the stock will hit the $200 strike price.
"It’s almost as if Apple can do no wrong," Wilkinson said. "The speculation shows a feeling that the iPhone is going to work and that there will be greater things going forward."
Volume in options of Juniper Holdings swelled Monday as traders made a series of bullish bets. Activity has been concentrated in the July 25 and 27.5 strikes amid rising implied volatility. Call volume has outpaced put volume in the Juniper options by a margin or more than 2 to 1.