Nov 13, 2018
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Theta is an option sellers best friend. It is the money we make.
If you put on a trade, an option-selling trade, you can look at it and say, how much theta is this trade?
If the stock does not move that whole day, that's how much that your trade will decay. That's how much money you will make in your trade, because the options will be worth that much less at the end of the day.
Now, theta decay, I don't want this to be a big lecture on theta decay, but theta decay does go in a exponential curve and whatnot, and we can cover that in a later bit.
But my point here is that the more theta we have, the more money we make, and when the markets are closed on holidays we still get the theta, but there is no risk, since the stock's price is not moving. Stocks are closed, the markets are closed, there's no even after-hours trading. There's nothing, it's just closed.
And the options that we sold are losing value every day. There's a theta decay rate, there's an amount every day that the option loses value. That sounds like we're getting something for nothing. That's like free money, huh?
I mean, that'd be kind of pretty cool. But do we really get a free day of theta on a holiday? Kind of, not exactly. Kind of, all right? Let's get to this.
Now, if you think about it, the weekend is the same thing, because the markets are closed, so more free money, right?
We don't even have to wait for the holidays. Every weekend we get free theta. So let's just do this, let's go in on Friday close to the close, sell a whole bunch of options, get the theta decay on Saturday, get the theta decay on Sunday, and then on Monday morning at the open we buy all those options back. Oh man, that's like free money. No risk. That is a wonderful, can't lose scenario, right?
Well, you wouldn't be the first person to think of that. I hate to break it to you, but everybody knows that. Everybody knows about theta and the weekends. Sellers do, option buyers do. So yes, we do get the theta decay every day the markets are closed, but how much we get is the issue.
And there are ways to take advantage of how the theta decay works. Which will be revealed in this episode.
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