Momentum in the Second Half

Andrew Giovinazzi

Yo Pit Crazies,

Right now, I’m riding a pair trade in Nitro Trader for Delta Airlines Inc (Ticker: DAL) and American Airlines Inc (Ticker: AAL). A simple pair trade is just a long side in one stock, and a short side in another. This is a strategy Mark and I employ to create market neutral strategies.

If any of you can recall the older Japanese Iron Chef series, Chairman Kaga would implore:

“One cuisine reigns supreme!”

That’s how it is with a pair – one side should make more than the other. One stock will reign supreme.

3 month DAL chart with 1 day candles

My pair trade in DAL/AAL is theta flat, meaning the option time decay isn’t costing me money, but it does limit upside performance somewhat. An upside runner in DAL will make the trade profitable, but …

Is it time to step on the gas in DAL?

The Theta of a Trade Tells You What Gear You’re In

That headline is a mouthful. Theta is the Greek word describing how much money it costs to hold an option position every day.

Positive theta means the market is paying me, and I expect the trade to move toward the strike.

Negative theta means I am paying the market, and I want the trade to move away from the strike.

My original idea with DAL was a diagonal call spread that leaned bullish but had positive decay. I sold a short term out of the money call and bought a longer term in the money call. The AAL side was just a cheap put at the money. The DAL call spread is green and the AAL put is red. The net position is now producing positive decay and positive profit, since DAL is up and pushing toward the $50 call.

At this point, post holiday, I want to add DAL as an Easy Button position. The momentum is strong, and option prices are cheap. I want more gas in the trade.

Speaking of gas, many stocks have languished in 2023. They have a second half to catch up.