Don't Forget About Positive Theta

Posted on Wednesday, January 30, 2019 at 2:52 PM

Here is something to think about next time you are bullish and are considering a bull call spread as one of your options as an option trader. Many times, moving the spread in-the-money (ITM) makes sense from a positive theta perspective. Let’s take a look at a recent trade idea we covered in Group Coaching.

On a recent Friday, we were looking for a bullish opportunity on Apple Inc. (AAPL). The stock broke above some morning resistance and was trading around the $146.85 area. A 145/150 bull call certainly could have been considered for about a 2.60 cost. Moving the spread $1 lower overall (144/149) cost 2.85 after middling the market but also moved the spread a little deeper ITM, as seen below.

What does moving deeper ITM do? As always in option trading, there are risk/reward tradeoffs and this trade is no exception. The risk goes up, which means the reward goes down, but lower strikes allow the spread to produce a positive theta on the trade sooner if the stock responds and increases in price. Remember theta is highest at-the-money (ATM), so when the stock price reaches past the breakeven point of the trade, in this instance $146.85 (144 + 2.85), the spread is increasing due to positive theta.

Fast forward to three sessions later. AAPL has responded and has moved higher and now the spread can be sold for around 4.50 without middling the market. Of course most of the heavy lifting came from the stock moving higher and positive delta increasing the premium. But as soon as the stock crossed the breakeven level, which it did sooner by moving the spread a little deeper ITM, positive theta added to the premium.

As you can see above, the position still has around 0.15 (0.24 (short 149 call) – 0.09 (long 144 call)) theta helping it to an even greater profit. Positive theta can be a great addition to vertical debit spreads like the bull call discussed above. It is great to count on delta to profit, but don’t forget positive theta can help too.

John Kmiecik
Senior Options Instructor
Market Taker Mentoring, Inc.

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