Trading With Options – How To Trade Options Video 41 part 4


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Also, remember that when you’re buying the stock, the commissions are very low. So far, we’ve had three transactions, and it’s only cost us $15 in commissions. Plus, we’ve accumulated additional profits by being long the stock, as the stock has moved up.

Let’s go back and reset everything. This time, the price moves against us. Let’s say it goes from the current price of $46.27, down to $45.27. Let’s say the price goes down to $45. We’ll adjust our stock price to $45. Aren’t we lucky? We are exactly Delta-neutral. Because the stock came down, we actually got into a Delta-neutral position.

As time progresses, that helps us collect the $43 in Theta that we can receive from this position, from holding it, because our Delta is almost perfectly neutral. In other words, we want to be in the center – not of our expiration graph, but we want to be in the center of our current profit and loss graph, which is this white line here.

Because we had such a large move down, it took a couple of days for it to adjust. Now, we continue to collect that $45 of Theta every day. What happens if the price moves down another dollar? For the QQQs, that’s a fairly large move. Now, we are approximately 300 Deltas long. In order for us to get Delta-neutral, what do we have to do? We have to go in here and sell 300 shares of stock.

If we sell 300 shares of stock, we are Delta-neutral. We have a current profit on our position. You can see that you can adjust with stock in order to become Delta-neutral. That’s why I call it Theta scalping. When we get Delta-neutral on this white line, which is our current profit and loss line, we are able to collect the maximum Theta for those days, in which we are Delta-neutral.

Here is the criteria for this. You’re going to be putting on your position. You can put on your iron condors. You can do any kind of trade in which you have positive Theta. You can even do this with calendars. You can do this with double calendars. You can do this with diagonals. I prefer doing this with iron condors and vertical spreads, for credits, in which there is positive Theta.

The reason for that is that, if you had negative Theta, you are not scalping for Theta. You are scalping for profits on the price of the stock, like for Gamma scalping. The criteria is that you want to do this only on positions that are positive Theta. Number two is that you only want to do this on indexes or ETFs, in which there are liquid options.

For example, you want to do this on the DIAs. The DIAs are a little bit more expensive. The DIAs are about $114 a share. Adjusting for Theta, or Theta scalping, could be a little bit expensive on the DIAs. You could do this on the SPYs as well. Once again, the SPYs are a little expensive. They’re about $125 a share.

That’s why I like to do it on the QQQs. Number one is that, if we just take a look at a graph of the QQQs – this day in particular, in which the QQQs went from a low of $44 to a high of $45.97 – that was a one-point move in the QQQs. On the Dow, that was a 300-point up-move.

You can see that the QQQs don’t move as much. That’s why I like to do it on the QQQs. There are other ETFs out there that you might be interested in doing it on. You could do it on DUG, or SMH. You could do it on XHB. The only thing that you have to be concerned about, though, is the fact that you need to be able to borrow the shares, in case you need to sell it short, just like we did with Gamma Scalping.

If you’re going to do an ETF, make sure that you can borrow those shares. The other reason that I only do it on ETFs or indexes is because with stocks, if you happen to purchase a stock like AIG, and it suddenly drops from 30 to 23, which is a 7-point move, overnight, you’re going to have a very difficult time adjusting for Theta, or Theta Scalping. Always make sure that you do it on an index that you can borrow shares, and do it on an index that doesn’t move too much.

The QQQs are absolutely perfect for this. We had a 300-point move in the Dow Jones Industrial Average, and in the QQQs, it only went up $1. It’s relatively easy to adjust, when it only goes up a dollar, after a 300-point move on the Dow.

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