Avoiding #TimeDecay on a Directional Option Trade #NVDA #Theta
Hey guys, I have a fun trade going with super low risk, and I am using it to display a strategy I have historically used with great success. It may feel boring, but for those with good risk mgmt this is great to put on.
‘Put’ on :P
We are using puts in this trade. I will post a few pretty charts below, but the charts have nothing to do with my trade. This isn’t a technical trade – I am doing it because of global macro news. Haven’t even paid much attention to how they have been doing.
Earnings on May 15th were a beat $0.64 beat vs a $0.57 estimate. A 13% surprise for traders. Stock proceeded to drop 16% over 18 days. Then it rallied hard. Now they are forecasting $0.83 – most likely will be a sell off leading up to it. Oh yeah – and we are in a trade war. I rode this stock up. I hope to ride it down a bit.
To the ‘Put’ at hand – the trade is gaining slight premium rather than losing it through time decay. Everyone is afraid of directional trades in options because of this, and I get it – time decay sucks. That is why we put on the boring delta neutrals to sell volatility.
For my trade I did a long put vertical.
14 Day expiration and high delta of -11.04 – so this trade favors the market going down – because for my trade I picked a vertical Put DEBIT spread.
Has a theta of .875 (14days) – if you go 49 days out we are looking at much less, because we are so far out .231. However – once again you will not be paying out theta if you were to hold this trade, it would be rising, and rising in your favor. This is because of the selling the 160 Put.
If I were to just want to make a short position, I could purchase the 165 put outright and I will have a short directional bias ---however--- that theta with 14 day expiration will have a theta decay of -23.31.
It is because of selling the 160 Put which yields a theta premium of 24.186 that we do not have to pay out any time decay.
So in this trade, we do have defined gains (a max on gains of $248) which stinks. But then again when are gains ever unlimited? Max loss is 252.
Probability of profit is 54%.
#MATH
‘Put’ on :P
We are using puts in this trade. I will post a few pretty charts below, but the charts have nothing to do with my trade. This isn’t a technical trade – I am doing it because of global macro news. Haven’t even paid much attention to how they have been doing.
Earnings on May 15th were a beat $0.64 beat vs a $0.57 estimate. A 13% surprise for traders. Stock proceeded to drop 16% over 18 days. Then it rallied hard. Now they are forecasting $0.83 – most likely will be a sell off leading up to it. Oh yeah – and we are in a trade war. I rode this stock up. I hope to ride it down a bit.
To the ‘Put’ at hand – the trade is gaining slight premium rather than losing it through time decay. Everyone is afraid of directional trades in options because of this, and I get it – time decay sucks. That is why we put on the boring delta neutrals to sell volatility.
For my trade I did a long put vertical.
- Purchased Aug 16th 165 Puts
- Sold Aug 16th 160 Puts
14 Day expiration and high delta of -11.04 – so this trade favors the market going down – because for my trade I picked a vertical Put DEBIT spread.
Has a theta of .875 (14days) – if you go 49 days out we are looking at much less, because we are so far out .231. However – once again you will not be paying out theta if you were to hold this trade, it would be rising, and rising in your favor. This is because of the selling the 160 Put.
If I were to just want to make a short position, I could purchase the 165 put outright and I will have a short directional bias ---however--- that theta with 14 day expiration will have a theta decay of -23.31.
It is because of selling the 160 Put which yields a theta premium of 24.186 that we do not have to pay out any time decay.
So in this trade, we do have defined gains (a max on gains of $248) which stinks. But then again when are gains ever unlimited? Max loss is 252.
Probability of profit is 54%.
#MATH