Tackle Today: Debit Spreads with positive Theta?
August 20, 2019
Last update: July 2021
≈ Shut up and take my money! ≈
Imagine you can have the best of two worlds on the same trade. How happy would you be?
Delta and Theta, usually portrayed as natural enemies, can be the next #BFF of your portfolio. By joining forces together, they will let you gain some exposure to price direction AND collect some premium while on the ride.
Sounds music to your ears, doesn’t it?
The key lies in the net amount of Extrinsic Value (ExV) you collect between the long and the short option contract. The amount of ExV you collect by selling an option *must be higher* than the amount of ExV you are paying for on the long option. This way, the Theta will be positive even if the spread nets a debit.
Option sellers naturally got time on their side because they are selling time and uncertainty, whereas buyers have time as their enemy, UNLESS, they too sell more time and uncertainty than they pay for.
Take a stock that is trading at $117.35 as an example. The setup is the bearish retracement and you are expecting it to quickly drop to $116-ish. You then buy the 59 DTE ITM 118 puts and sell the OTM 116 puts, creating a 2-dollar wide Bear Put Spread:
- Max loss: –$63
- Max profit: +$137
- Potential ROI: +217%
- Daily Theta: +0.019
- Delta: –9.59
Still don’t believe your eyes? Check the Chart of the Day. Sweet.
On tonight’s Coaches Show, your hosts Gino Poore and Grant Larsen will walk you through the Bear Put Strategy from the new Tackle Trading Playbook project. You don’t want to miss it.
Chart of the Day
Debit spread with positive Theta
Video of the day
What Are Debit Spreads
A Debit Spread is an options strategy that requires simultaneously buying & selling options contracts on the same underlying security, same expiration date but different strike prices, resulting in a net debit.
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