My strategy involves making profits from an increase in implied volatility on long straddles/strangles.
Enemy: Time decay
I am aware that the time decay accelerates. I read that for a 9 month options contract, time decay is:
- 10% for the first 3 months
- 30% for the second 3 months
- 60% for the last 3 months
Friend: Implied volatility
Even though the longer contracts are costly, they are more sensitive to the implied volatility as vega is higher. Buying underpriced options ais most likely to provide an opportunity to sell if IV increases.
Here is the problem. Even if I can overcome theta by IV, there is this slippage caused by having to both buy and sell. The more illiquid the market the greater the slippage. My concern here is:
How liquid is the options market?
How many stocks have options expiring in 9 months or more that also have sufficient liquidity?