Fairly quiet day at the market today with a bit of uptick as I expected it.
Although higher volatility means more opportunity for options traders, I don't mind the sideways moves for now.
Every day the theta decay makes my options lose a bit of value, which is one of the key points of options trading.
What's the theta decay?
Theta is the time component of the stock options.
Let's assume that we sold an option for $0.60 with 30 days to expiration. In this instance if everything freezes then the option value drops by an average of $2 per day and reaches $0 by expiration. The decay is greater as we get closer to the expiration.
For those, who are new to my daily market comments, I place and document one trade a day with the objective of helping everyone learn how to trade options.
What's my trade for today?
#AAL (#AmericanAirlines). I trade this position a fair bit as I am very comfortable with the $14 price level. Every time the stock goes below $14 I look to sell a $14 put. Because it's in the money (ITM - meaning that the put option strike price is higher than the stock price), I have a fair bit of intrinsic value in it. The intrinsic value goes away very quickly if the stock bounces back, which makes this trade potentially quick and lucrative.
Trade Type: Short Put
Expiry: 20 Jan
IV Rank: 12.9
Cap Req: $273
Annualised Prof at Expiry: 348%
Let me know what you think.
Closed at $0.64 for an annualised profit of 1284%.