Today’s question is all about day trading options. I’m going to share with you some thoughts and insights.
Here’s the question:
“Hi, Sasha! I have a question about how to put time decay on my favor when day trading options. So far, I’ve been researching old examples on the internet to teach you how to do the selling premium.
But in a swing trading format like pretty much is the position last days and ones that your option expires, you collect the premium. But like I said, I’m doing day trading, and I would like to know how to put time decay on my favor as a day trader of options.
And I’ve read that it’s a seller instead. I’ve been experimenting with credit spreads, selling options with a cover a call or put, and in some of my test time, decay is indeed on my favor. But in others, it’s not even though they have relatively the same time to expiration like two to three days.
So I’m a little frustrated. Not sure how to do these. I don’t even know if it is even possible. So just reaching out to see if you have any experience with it. And then can you direct me to the right path. I’m repeating; this is for day trading and how to use time decay on my favor day trading. I cost my position in 15 minutes, 5 minutes”.
Well, 15 minutes and 5 minutes, that’s almost high-frequency trading.
Let’s check these things out. I’ll share with you some thoughts and insights and go from there.
Usually, with options, you’re not going to be day trading that fast or that quick: not 5 minutes or 15 minutes. You’ll probably hold even for a two-day trade in an option contract. That’s already very short.
Now usually when you’re day trading, that means you’re looking for price movement. If you’re day trading for 15 minutes, you’re looking for a movement in price. That’s ultimately the goal. But if you want time decay in your favorite, this is how you could think about it and do it.
If you’re serious and interested in some more detailed things about option trading we do have a ton of great courses >>> Click Here
If you’re brand new to options, here’s what you start with. This is what typically people do – they buy a call.
And then they’re waiting for that price to move because you’re day trading 15 minutes is a price movement. It’s not time because there’s not enough time to make it from options.
For one, you’re worried too much about the time problem when you’re not in the trade long enough anyway.
That’s one thing to be aware of.
Let me shake you a little bit. You’re worried about time, but you’re only in it for 15 minutes. Here is a Netflix trade, and my theta is negative 16. That tells me that I’m going to pay $16 per day in the loss of time premium by holding this option contract.
Even in one day, if the stock doesn’t move, I lose about $16. Now that’s not too bad considering you’re looking for a price movement. In this stock where you’re investing $585 if I’m looking for a $10 move in Netflix, that’s already $435.
I think if you’re focused on movement in price, stop worrying so much about the time decay.
But if you want the movement in price, how do you do it?
Well, usually what you have to do is you have to sell the time premium. You could see what happened here is if I sell the call, it flips it the other way.
Let’s say I’m still bullish in the stock. How do I get that?
I have to flip the other side. In this case, I would have to flip to the put side. And this is where you get the time premium in your favor.
I will back this out to maybe a 250 strike price or even a 270 strike price. All of a sudden, now I have a positive theta decay.
You could take a look at that – I’m making $16 a day if it stands still or doesn’t move. If I’m holding it for 10, 15 minutes if you’re trying to day trade these and you want positive theta, then you want positive Delta. In this case, one of my bigger Greeks is the Delta.
That’s the core basics if you want positive theta. You have to be more of a net seller of options or overall a seller of options to get that. Of course, you could buy one in the future out in time, and then you’re technically a net buyer like a calendar spread you’re kind of buying it. That’s because you have more time value in the further month.
But in this case, to start our baseline and basics, you’re selling the option premium. And that’s the start of getting your positive theta. And now you need the movement in the stock price. If it goes up to ten points or so, you’re making about $312.
The problem with this is you have an unlimited loss. This is why people do spreads, credit spreads, and those kinds of things.
You buy something further down. Now instead of a seller, you buy yourself some protection. And now you have become ultimately here no loss in theta. But still, you can trade it right here.
That’s because you’re getting a positive Delta that refers to any one dollar movement in Delta or one dollar movement in the price you make $12.
That’s how it works. Looking at my current position right now, I’m down $15.
By the time you start the trade, you’re off. Delta is about 12. Let’s say and move this up one single dollar. Well, you should now be out breakeven. And you can see right there I’m breaking even.
That’s because I’ve offset this by about a dollar. You could see Delta is 12. And if I move this up to $2, I should be up about $12 right there and so forth.
It’s all based on the Delta if you’re day trading. Because if you’re day trading and you’re selling it in 15 minutes, you’re focused and you’re looking at the price. That’s what you’re trying to do.
You need to have something with positive Delta and positive movement to be able to get that bullish position. Of course, you could do this on the call side as well in a negative direction, which I’ll share with you in a second.
But you need something where you’re selling an option premium to collect that premium to decay it faster than the other premium. And the one that you’re selling is the closer one.
That’s why it decays more versus the one you’re buying for protection.
To do this the other, let’s say I’m bearish on the stock. Well, instead of here a buyer, I’ll sell it. Analyze the trade.
Now I’ll buy one for protection. Here’s a 300, and now you’ve become bearish on the stock with a positive theta.
You’re not losing theta anymore, at least. And now you have a negative Delta, which means you make money as that stock price goes down. If it drops 10, you make about $86 on 750.
You know 10% or so. Pretty good in that regard.
This is how it works.
Are there more advanced strategies to day trading or waiting for a move when it comes to option?
Absolutely.
Let’s say here is a butterfly. Here’s how this works.
I’m going to start it out with 295. Let’s say that’s 285, that’s 305. And don’t stress how I’m picking these because it’s way more beyond the scope of this video.
I’m just showing you the concept. If you want to learn more, you can check out courses or do a coaching session with me. There are so many more opportunities.
Maybe my theta is not negative, but it’s also not super positive; at least it’s kind of negated. It’s not something that’s part of the equation.
Here’s a butterfly spread where my theta is about one.
I’m making about one dollar that I’m waiting. Because if you’re holding it for 15 minutes and you’re all making $1 day or $15 a day. Again, you’re day trading, so you’re basing it based on the Delta. That’s what you’re trying to do.
In this case, you’ve eliminated that theta. Now what you’re waiting for is for that stock to pop. And what you can do with the butterflies it’s such a small investment.
Let’s say $140, and if you’re thinking it’s going to move, your risk is also not too bad. That’s because if it goes against you, you could get out 10 points lower for 33. And then up here, you’re making about 26 if it does pop in your favor.
I’m risking about $30-$40 to make about $30-$40. Let’s see how we stack this up for some people that have more capital.
I’ll show you what that looks like. If you’re normally putting on about $2700 on the trade and let’s say instead it goes against you, you’re risking about $500-$600 to make about $558 potentially.
There’s vega that comes into play here as well. And now you’ve got a positive $18 in theta. It’s another way to play the stock, but you do have many more contracts here. There are many more commissions and those kinds of things.
And again, that’s a different story for another time.
What you can see here is I’ve gotten more of a positive theta. And I’ve gotten my positive Delta for a movement in that stock. Because as you’re day trading, you’re expecting positive movement or negative movement.
You’re expecting movement based on the price. And if you’re holding it for 15 minutes, that time value isn’t going to hurt you that bad even if you’re a buyer of option contracts.
But if you’re worried about that, overall you have to be selling option contracts to get a positive theta.There are many other strategies out there, but as far as a basic scope – this is the way it works.
You have to be a seller of option premium to get a positive theta. And if you’re day trading, you need some kind of Delta whether it’s positive or negative depending on if you’re positive you want bullish movements.
If you’re negative, you want bearish movements. And that allows you to place an idea on the stock on which way it’s going to go. And then, of course, you manage the money accordingly.
Hopefully, that answers your question and gives you some thoughts and insights.
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You could do a day trade almost on an option contract that expires extremely fast. And that allows the theta to kill. I don’t think I can do it here – zero days remaining.
I want to show you.
Buy a calendar, which means I’m going out one expiration day. Here’s October 19th, the 280.
Keep in mind there’s assignment problems and those kinds of things.
You could do the same concept. Now my theta is so high, and I have a bullish exposure.
Within a day or so, it will continue moving higher, and I’ve got that positive Delta. Now within a day, I’m going to be making about $50 every single day.
If I move this one strike further, you’ll get a better insight.
This is about seven days out. It’ll show you one day, two days into it you’re working that theta.
That’s the whole point – is to get that white line to keep climbing higher.
The thing is if you’re trying to day trade it and you want time decay, it doesn’t happen in 15 minutes if you’re holding a trade for 15 minutes. That’s the way that it would work.
Here it is right here. It’s the same type of concept.
I could position this on it to 285, and now I’ve got that same concept.
Let me put this trade-in right here, and if it does pop, I’m positive overall – creating a winning situation. However, my theta is not a huge loss here in this situation.
It’s still a positive theta. But it’s not going to work for too long because that eventually will expire. And then you take your hit or a loss at this point, which would be that green line negative $24.
That’s an exciting way of doing it to capitalize on it in that way.
And, of course, you could go maybe seven days out. It’s another way just to play the movement. But that as far as positioning, it is a whole another world end game.
Here’s another approach to it. You could see this one’s calendar.
That’s further out, but if you’re expecting a big move $30-$40, that’s a nice way.
You could say, if it goes against me, I’m risking $30-$40.
One of the other ways that I’ve seen some other traders do it when you’re day trading, and you got some serious cash.
You could go deep in the money. Of course, that’s because you’re expecting a big move. And when you’re going deep in the money, in this case, you’re expecting a fast move.
And you’re putting a lot of eggs in your baskets for that movement.
You do have that negative theta. That’s the best way to get a stock equivalent move. That’s because your Delta, one contract controls a hundred shares a stock, which basically would have a hundred Delta.
But in this case, you got 90, which is very close to the stock equivalent without paying the stock price.
I hope that gives you some thoughts, insights, and maybe some more things to think about.
If you have a personal question regarding trading, investing options, feel free to submit your question here!
