Yo Pit Crazies
Since I made the transition to retail trading a number of years ago, I have heard the term “income trade” like it is some gift to sell a spread and get the money.
During 15 years of floor trading, I never heard that since no one came in and priced the “income trade.”
Maybe because I was buying all that juice.
As a floor trader, I learned a trick about selling premium — and I can teach it to you.
I can teach it to you … but one must have an open mind.
The trick is this: Use positive theta trades to finance buying options.
Now, you may be asking, “What the heck do you mean, Andrew?”
Well, theta is just the value an option decays with all other model inputs being equal. If an option is sold, the option seller expects to collect a theoretical amount of decay every day.
That is money in the bank only after the option position is closed.
Don’t forget the closed part.
Every risk graph created to model theta hides the secret that, under normal conditions, only about 50% of available decay is accessible until late in the cycle.
And I mean with 3-days-to-go late.
These are rough guidelines, but:
- Door No. 1: 50% of the decay will happen from entry to 5 days to go to expiration
- Door No. 2: 50% or the balance of decay will take from 5 days to expiration to until 4 p.m. EST on expiration day
This leaves the option seller with some questions …
What is the purpose of the option sale? Do you hit the beginning of the cycle or the last, high-octane, fast decay part of the cycle?
In the case of the Power Moves Portfolio (see below), I want to use a positive theta to buy other options. That is my position goal, so I use the earlier part of the cycle.
I want to achieve “theta balance.” That means I have long theta (positive decay) where I have edge and use the projected proceeds to buy options.
There are a lot of ways to manage a position but this works best with multiple overnight positions in several names …
That sounds like the Power Moves Portfolio. And so far it is working pretty well. I’m up $1,500 on a $15K account I have allocated, so 10%. That’s the good news.
Also, I am now just long some calls and puts in General Electric (Ticker: GE), Ford (Ticker: F), Global X CyberSecurity ETF (Ticker: BUG), Palantir (Ticker: PLTR), Taiwan Semiconductor (Ticker: TSM) and Cleveland-Cliffs (Ticker: CLF)
Now I need to hunt for some positive theta. I own all those calls and puts with July and Sept. duration mostly via house money (using account gains to trade other securities), but a stall in the market would mean my gains go bye-bye for a while.
Frank Gregory just provided a new list of Power Movers, but the volatility is cheap in all of them.
To be honest, implied volatility is at the low of the year, so a credit spread will take a while to pay, per my lesson above. So maybe a combination of credit spread and long strangle somewhere is the answer.
Frank’s new ticker list is:
- Enbridge Inc. (Ticker: ENB) pays $3 in dividends a year, so a tough option trade but a risk reversal might work
- BP (Ticker: BP) A put credit spread in the July cycle for a 3% yield is not terrible.
- BWX Technologies (Ticker: BWXT) is too thin for an options trade for now, but it’s a good story. And Frank has a knack for a story
- All the FAANG stocks are under the Tax Man’s hatchet. As funny as this sounds, just a straight strangle purchase in Invesco QQQ Trust Series 1 (Ticker: QQQ) sounds pretty good, since the IV is so low.
I’m leaning towards a short put spread in BP and buying a one-lot strangle in QQQ.
Finally, our track record in the portfolio so far:
To Your Trading Success,