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Tackle Today: Theta & Debit Spreads

July 12, 2018

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Last update: July 2021

Better than a photo of your mother-in-law in the wallet.

Better than a baby pigeon.

Better than an honest politician.

These things do not exist. No one ever saw them. But Debit Spreads with positive Theta, oh yes, they do exist.

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.

“I’m paying for a spread so time must be against me, corroding my contracts.” – you’d ponder.

You got a point. 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.

Go to your paper account and build such spread. Go to the Analyze tab and simulate the passage of time. Assuming underlying stock price and volatility are unchanged, time passing will make the spread gain in value.

That should be an interesting concept to develop a system upon, don’t you think?

If you sell more ExV than you buy, The Almighty Titan Cronos will always fight alongside you.


Chart of the Day: Debit spread with positive theta

Chart of the Day: Debit spread with positive theta on Tastyworks trading platform (option chain)

Video of the day: Theta research & ROID

The Tackle Theta Research Spreadsheet helps a trader determine whether they have are good Cash Flow trades or not.


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