For those of you that are new to trading and wish to get started, one of the first things you have to look at is the type of trading you wish to conduct. As traders, the coaches trade everything as some types of trading work better in certain cycles than others. The reality, though, is we’ve been trading for a long time while many of you are just starting. There are three basic types of traders: delta, theta, and vega.

Delta based trading is directional trading. Before you ask yourself what that means, realize that many of you are already trading delta. When you invest in a 401k which is allocated in mutual funds, you’re a delta trader as you make money as the market goes up (hopefully) and lose money as the market goes down (certainly). This is the very nature of delta, which simply stands for direction. The types of delta strategies are buying stocks, ETFs, mutual funds, buying calls or puts, or currencies. Any time you buy (long) or sell (short), you’re a delta trader. Delta trading is the most aggressive form of trading as your risk graph is vertical. I’m primarily a delta based trader as I trade forex and options with directional strategies.

Theta is time based trading. The number one certainty in life is time. We can guarantee that time will pass, and thus we like to trade strategies that benefit on the passage of time. Theta strategies are covered calls, naked puts, credit spreads, and carry trades. There are many more, but those are the basic ones.

Theta trades are simple and conservative in nature. Remember what I always say: it’s not difficult because you are new to it, it just means it’s new. Theta is a simple concept and one everyone already understands. There is theta in everything. Consumers refer to theta as depreciating assets such as an iPhone, a vehicle, or anything they purchase. They understand that if they buy something like a truck for a $30,000 lease and drive it off the lot, it will decay by 10% in the first year. If you calculated the per day depreciation, it would be 30,000 x .10 = 3,000/365 = 8.21 (look at my amazing 5th grade level math skills). The theta on the lease of the truck would be $8.21 depreciated every day. This money doesn’t just evaporate into thin air; it goes from the buyer of the lease to the seller of the lease. If I substitute the truck lease for another product called a put or call option with a value of $30,000 in total contracts sold, theta will work the exact same way.

For example (see below), if I sold 250 36 strike put options on GPRO, we would receive $30,000 from the buyer. We are simply selling the buyer a truck lease for $30,000 called a put option. The theta number is .03, which accounts for .03 cents per share of devaluation per day, which on 250 contracts is $750 of depreciation or theta each day. At the time of expiration, which is in 44 days, the value of the theta will be zero. In essence, we are selling a truck lease that will devalue by 100% in 44 days and we get to keep the $30,000. Car leasers are in the wrong business as they only get 10% devaluation over 365 days. Theta is very conservative in nature, with some of the highest probability in any market. The GPRO example/illustration would have a 76% probability of success.

Vega trading is all about volatility rising and falling. Vega trading is also conservative in nature and is based around expected movements in volatility. I’ve discussed this in videos in the past (see below).  A company reporting earnings is the most uncertain time in a stocks valuation.  The stock can move either up or down quickly and most of the time will gap after the earnings is announced. Traders do not care if the stock goes up or down, they’ll trade either direction. What traders do care about is uncertainty. In times of uncertainty, the investors will buy put options to protect their investments. This drives volatility higher. To take out the delta and theta risk, we trade vega.

I love all forms of trading and typically will have all forms in some capacity at all times. However, as a new trader, you have to start somewhere. Most start with buying stock or call options. Again, this is very aggressive, and oftentimes due to ignorance and allocation issues, this drives the new trader to blow up their account and claim everyone loses at trading. That’s impossible, the new trader just gave their money to the more experienced trader who knew how to sell. What I am suggesting, is theta. In my estimation, theta is the best form of trading for new and old traders. As the old say goes, there are bold traders and there are old traders but there are no old bold traders. The bold is the delta, the old is the theta.

Remember the number one certainty in life is death and taxes. Sell the time it takes until death and sell the currencies with zero interest rates to get the interest to pay the taxes. I love trading!

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