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Tackle Today: The Time Decay Curve

June 25, 2020

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Understanding the role of Theta


One of the most important concepts to understand in options trading is Time.  Time passing will either help an options trade or hurt an options trade depending on what type of trade it is. 

An options value is first understood as simply a price.  If you buy a call option for $3.00 per contract you will pay $300 total for the call.  The call option gives you the right to buy 100 shares of an underlying stock at or before a set date (expiration date) at a specific price (the strike price). 

Buyers of options, like calls, carry negative time implications.  This is called Theta and knows as time decay.  Every day that passes you lose a little bit of the value from this reality of time passing.  Whether your $300 trade goes up in value and you earn a profit will be dependent on the stock moving in your favor, as you are fighting time passing.

Option sellers use strategies like short puts (naked or cash secured), Covered calls against shares they own, and option spreads like Bull Puts, Bear Calls, and Iron Condors to generate positive Theta and time decay.  These strategies are important and valuable in many market conditions – particularly markets that become range bound and trendless.  But, in any market, some traders use Theta trades as a primary source of their strategy selection to generate ‘Cash Flow’.

We call this style of trading ‘Theta’ and we have dedicated a section of our Tackle Trading Playbook to help you learn how to build Theta trades with rules from our coaches.  If you’ve never studied some of them, you can review the playbook here: https://tackletrading.com/store/tackle-trading-playbook/

If you’re going to trade Theta strategies, you will need to understand how much Time to sell in your options, how it will impact the way you trade, and how to determine a good trading candidate from a poor trading candidate. 

Many traders will use a combination of Delta, Theta and Vega strategies to build their Trading Plan for their capital.  What type of trader are you?  Take some time to build your system, through rules and proper design. 

Spend some time studying Theta, and see if there’s a role in your trading for some of these Cash Flow strategies.


Programming Note: We had a technical issue with Zoom last night for the STEP System mastermind group, so it has been re-scheduled for today at 7:00 pm EST.  We will still have our other regularly scheduled Thursday webinars. You can access the MMG here: https://tackletrading.com/events/

Chart of the Day

Time Decay Curve

Options time decays is non-linear.  Each day that passes has it’s own amount of time decay.  The further in time you are out, the less time decay per day.  The closer you get to expiration date for the option, the higher amount of time decay per day.  Many traders will buy longer term options when they are trading directionally and sell shorter term options when they are trading for cash flow from time passing.

Video of the day

Time Decay

Coach Tim answers a question from a #TeamTackle student about the impact of Time Decay. 

Traders Lounge 11 AM EST

Join the coaches in this live lounge, ask questions, discuss ideas or just sit back and listen to veteran traders discuss market conditions.

Cashflow Club 8:30 PM EST

Held every Thursday before Friday’s option contract expirations, this show helps you perfect your favorite cashflow strategies.

Halftime Report 12:30 PM EST

The Halftime Report starts at 12:30 EST and covers what news is driving the market, chart analysis from the movers and shakers of the day and fun in a way that only Matt and Tim can deliver.

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