Tackle Today: Watching water evaporate
December 27, 2018
≈ The wonders of Nature. ≈
“Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.”
— Paul Samuelson —
Mr. Samuelson was an American economist, considered by many the Father of Modern Economics. He was also the first American to win the Nobel Memorial Prize in Economic Sciences.
For Theta traders, however, investing should be more like watching water evaporate.
Net Liquidation refers to how much of the net credit received from the option selling was already pocketed on the trade due to time decay.
Imagine the option premium is like the water inside a glass. As time passes, the value of the option gets corroded, like the water naturally evaporating from the glass into the atmosphere.
As a patient trader that you certainly are, you get to sit and witness the beautiful phenomena as it develops. The value of the contract evaporates and after a certain period of time you buy it back for a nickel. Or less. Or don’t buy it back at all. Ashes to ashes, dust to dust.
In our glass of water analogy, half a glass would be 50% net liquidation, i.e., you’ve made 50% of the total credit received from the option selling. The empty glass would be 100% net liquidation, meaning no value was left on the contract and you’ve pocketed the full credit sold.
Chart of the Day
50% Net Liq
Video of the Day
What is Theta? (BONUS: FREE Options Greeks Guide)
In this video, you will learn what the Options Greek THETA is and how it can be used in your trading routine in order to perform better in the market.
Today’s Lineup
ROOKIE CORNER
Taming the Imp Part II – The Trade
So, last week we were musing on how to tame implied volatility so that is is less painful to our bankroll when we need to hedge our positions against the big bad bear attacks and the market has most definitely done that with fervor as of late. To re-iterate the problem so that everyone is up to speed the issue that a lot of traders run into is that when buying put options after the market has started to fall the options become rather expensive due to this pop in implied volatility.
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