Thursday, December 27, 2012

Analyzing short put delta of iron condor vs time decay

A few days back, I analyzed the relationship between OTM put Delta and Theta to understand how time decays for my short iron condors with different short put strikes.

I selected a short RUT put strike of Delta -0.22 in my 20 point wide put spread and another RUT short put strike of Delta -0.25. I kept the call spread within the iron condor the same in this analysis. The former (Delta = -0.22) had a slightly higher Theta (8.28) and Delta (-4.8) as shown in the graph below, while the Vega was similar (actually slightly higher as well) in both cases.
For the IC with short put of -0.25 Delta, it had a slightly lower Theta (7.95 vs 8.28) and Delta (-3.76 vs -4.8) while Vega remains close (-48.98 vs -49.28). The differently colored curves showed P&L of 6 calendar days apart. So the farther OTM IC would achieve a profit of $265 (vs $259 in closer OTM IC) near Jan expiration time if price does not change.
Overall, the analysis indicates time decays a little faster for the farther OTM option IC than the closer OTM option IC from 8 weeks to 4 weeks ahead of their expiration. Since I plan to exit positions 4 weeks before expiration whenever possible (as analyzed in a previous post), this farther OTM selection suits my strategy well and it provides higher probability as well. The cost of the change is less credit at the opening( but it does not cause slightly lower profit at the exit as one would expect).

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