Trade 39 A Theta Play

Market Range is Too Tight To Mention

We seem to be in a ±1% range which makes volatility plays interesting,but…….

The problem with anticipating higher volatility, is that it’s like the proverbial buses. You get a bunch which you can miss as the opportunity whizzes by. What is low volatility? When will we know what is high? A great deal of the time the market does nothing. Expiry week typically sees a drift with market bumped up on Friday at 10:00 am -allegedly. Waiting for vol can be a losing game, in this long only market.

So, what’s The Smart Trade This Week?

Trying to capture some theta with a calendar spread. Sell the near month, buy the far month. A slight variation as we are so near expiry- sell 2 near month buy one of the far month. We use July and August expiries, for simplicity. The trade thus looks like this:

Sell 7300 July put @ 7.5 x2=15,  Buy 7300 Aug put at 60. Debit =45     Resulting Greeks  Delta 0.024. Gamma 46 against us! Theta 2.16 in our favour Vega 3.677

What is The Overall Position?

Delta is negligible but gamma- the rate of change of Delta is a concern. However theta is 2.16 in our favour. The ideal situation is that the market drops but not too much into expiry. After that we want the put that we own to be useful- we could just sell. Or…construct a strategy around it. We can also explore what happens when a trade goes wrong, and we start to lose money.


Filed Under: InformativeWeekly Trade Idea

About the Author: First found out about options in 1995.From the arcane magazine Exchange and Mart! First trade- a covered call on VOD in 1999. Made 10%,VOD almost doubled. That's when I realised I was not a good trader,and I was forgiven thanks to the amazing world of exchange traded options

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  1. Terrapin Trader says:

    Not a great trade as there is little basis to take it other than to contiune to demonstrate the power and flexibility of options. Should the market smash up we will lose, not a huge amount but it would be annoying

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