Creating Positive Theta Decay Strategies

ClockOption traders that sell options will receive options premium can enjoy time decay. They can set up positive Theta decay strategies. If the options underlying is not moving and implied volatility stays the same, the options will loose money every day. Later on you will buy the options back for a much smaller price you bought it for.

Market-neutral strategies earn a profit when time passes and the “magic” of time decay (Theta) does its thing. Of course it is not as simple as opening a position and waiting for the profits to accumulate. There is always the possibility of a profit-destroying price change in the underlying stock or index.

Nevertheless, these strategies work well when the markets trade within a price range. The beautiful characteristic of these versatile option strategies is that they can be used by the bullish or bearish investor as well as by the market-neutral trader. Let us examine two strategies.

Calendar Spread

Calendar spread is used for stocks with low implied Volatility. We hope that volatility is increasing.

ABCD is currently trading at $100. We Believe that the stock price will go up towards $105. While iV is low you buy an out-of-the-money calendar spread.

Traditionally, the calendar is used by traders who believe that the stock price will remain near $100. But the maximum profit is gained when it moves to $105.


Buy ABCD Jan 15 ’16 105 calls for $7
Sell ABCD Dec 18 ’16 105 calls for $2

As times passes and the stock moves towards $105 per share, the position becomes more valuable and you earn a profit. That profit is maximized if the stock is almost exactly $105 per share on expiration of the nearer option. If implied volatility increases you close the position by selling the calendar spread.

If the stock price does not conform to your expectations, then the spread will lose value as the December call expire (and become worthless). You will close the Jan call that the call is more worth than what you have paid for the spread.

Iron Condor

Just as you can shift the strike price of a calendar spread to compensate for your market bias, you can do the same thing with an iron condor.

In the following example, assume that an SPX index is trading at 1598 and that you are bearish over the near term. The following is just one example of an appropriate iron condor.


Buy SPX Jul 17 ’15 1440 puts
Sell SPX Jul 17 ’15 1450 puts

Sell SPX Jul 17 ’15  1650 calls
Buy SPX Jul 17 ’15 1650 calls


We sell the short strikes 1 standard deviation away of the current index price.  This give us the probability of 68% that we can keep the credit received. We choose options around 45 day to expiration, this gives us enough time to adjust when necessarily.

Because you sold options far away it does not happen easily that you position (profit) comes in danger. When time passes the options decrease in value. You close this position when not later than 50% of the credit received. Better an profit in your pocket than a higher chance to loose your credit.





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