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painofhell  
#1 Posted : Monday, June 18, 2018 4:11:22 PM(UTC)
painofhell


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You've most likely heard the phrase, 'time is money", and were convinced that this was a truth equal to law. Just as mathematics has its conventions that are not law-bound, so it is true about time equaling money. Simple, right? In this article, I explore some of the remarkable aspects of an investment universe with negative interest rates, so-called negative carry trade, and relate it to the time-value calculation in options pricing, as well as how we should understand the calculus in our overall trading.

If you trade options, you should be familiar with the options "greeks", one of those being time theta, the first-order derivative of the options pricing model. This calculation is an abstraction of what may be perceived as so-called time value decay. Those who are keen in math, are familiar with compound interest growth as well as decay in sociology and science fields. Because finance is mostly constricted to zero-bound limit investments, there isn't a practicing application of negative growth for compound. That simply doesn't exist in finance. However, as mentioned with the options calculus, financial options have a time value that inevitably decreases day by day. The greater the theta, the faster this rate of price decay becomes. When you write options, this becomes more intriguing, as it can generate income for your underlying investment.

Understand that this time-value of options prices is arbitrary, because it takes a back seat to the volatility of the markets and investment, and because it can be skewed by market forces. There isn't a set formula for factoring time value in the price. However, because markets must be efficient enough not to allow ludicrous arbitrage opportunities, market participants and market makers will eventually discount prices so that the forward-futures price minus the spot cash price do not allow a risk-less rate greater than the prevailing market rate. This is what's known as interest-rate parity, and can be found in different forms and equations, such as with the put-call interest rate parity. This is where the futures contract is replicated with options. Either way, the difference between the two investments, the buying of the spot investment minus the credited futures contract, which should be at a higher price, shouldn't be that much different than the risk-free rate on the underlying asset. For example, the risk-free rate for the U.S. stock market is near 2-3% per annum. So, the interest rate differential between the S&P 500 cash market and the futures contract should also be near that risk-free rate of return.

However, when the basis is negative, as is the case with the EUR/USD, this is what's known as a negative carry trade, meaning the risk-free rate only exists if you credit the cash market and purchase the futures contract as your underlying base contract, as opposed to the other way around. This is not really a thing to do, and so the markets become skewed as suppliers and sellers don't find a forward price that they can sell as soon as possible. They no longer wish to supply the market; they only wish to settle at the best possible spot price in the near-term. This can affect what is known as backwarded markets, when the futures price curve is negatively sloped, and is below the cash market, this is backwardation.

The most important thing to understand is that the negative carry trade will influence the options calculus and disrupt prices from normal behavior to something more mysterious. If suppliers are not being compensated for their time of holding the financial asset or goods, suppliers and distributors will need to eventually charge a higher cost for delivery, insurance, and holding of a good or service. This is what makes up the convenience yield.

These aforementioned components to price can affect the overall time value of options, without there being a true calculation to the value of time each day as it relates to price.


" The thing to understand, is that time isn't necessarily money. In a negative carry universe, time is everything. "


Since, the investment itself has no prospects of bringing income or returns, markets are fixated on settling at the best price, no matter that quantity of supply, so long as they can get the price, because the costs of holding the asset is greater than the profit of supplying at a future date. The supplier will want to supply at the best price as soon as possible. As the options trader, it's useful to understand that the synthetic futures contract is compensating the buyer as opposed to the seller, in normal circumstances.
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GersonH  
#2 Posted : Sunday, September 09, 2018 8:57:13 AM(UTC)
GersonH


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Belize
Location: Belbopan

I think that time is important in the operative, but it is necessary to select the moments in which the market favors us to our operations, to have trading advice for beginners it is indispensable to recognize in what temporality to operate. It can be temporary for 4 hours for intraday or 5 minutes for scalping
epicresearch  
#3 Posted : Wednesday, September 19, 2018 1:13:33 AM(UTC)
epicresearch


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Man
Malaysia
Location: Kuala Lumpur

Ans is yes Time is must important factor in trading to follow market up downs. Timing is hard to master, but you can still capture significant gains and loss on an ill-timed trade if you follow a few simple rules of trading.
Jungshin  
#4 Posted : Saturday, November 03, 2018 7:18:17 PM(UTC)
Jungshin


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Joined: 11/3/2018(UTC)
Posts: 5
Korea, Republic Of

depending on our trading strategy, whether you want day trading, or scalping. for scalping techniques it must be more accurate in analyzing the market because scalping is required to see the m15-h1 timeframe
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