Capturing Theta

Trading Strategy to profit from Options Theta Decay

 

When to Exit Positions:

 

Every trade we put on with the Theta Plus method has a limited profit potential. The amount is determined by the Premium we collect from the short straddle. Likewise, every trade also has an expiration date. Utilizing this information, we can build expectations of how much profit we expect, and how much time we expect to spend making that profit.


In volatile markets the Theta Plus strategy often achieves a large percentage of the maximum profit potential in a short amount of time. For example, if we enter a trade with 30 days until expiration and collect a $1,500 premium for our Short Straddle, our maximum profit potential is $1,500. If after one week the underlying market has made a significant move, your position may be up over $1,000 with 23 days left until expiration. At this point, the trade has made money at a much faster rate than we expected, and holding the trade for the additional 23 days can only add a maximum profit of $500. At this point, it is more logical to exit the trade, and consider entering a new Theta Plus trade using the new at-the-money options.

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