A lesson in Options, Theta and Volatility

SPCE is a ticker we often trade in our MomentumTrades, it's one that I own shares on and regularly trade options as it is one hell of a mover!

Today after SPCE made its initial run I noticed someone big had the smart idea to sell Aug20 $75 strike calls likely against shares as this one is up big over the last couple months. After SPCE broke out and ran to targets with ORBI options were moving so fast I ended up cutting that position to focus on shares at 3rd target for an excellent return (10:30 Entered - 6.25 $49c @ 1.84, 11:00 Closed at 3rd target @ 5.18)!

About this time I decided whoever had the idea to sell $75 calls was onto something and began figuring out my entry on this trade as well. At 11:55 I sold an 8/20 75c @ 7.10 against 100 shares. After that initial run IV had spiked this morning and the bit it fell from the morning high back to vwap resulted in the option buyer losing over $200 in premium. Even after the afternoon run back up to new highs, that option closed the day down $60 despite being almost $2 above their entry!

That right there is exactly why I teach my traders to trade options that already have real value built-in.

Purely speculative OTM options bleed fast (theta) and are highly subject to changes in IV (Vega) and whoever sold you those options at the top DOES NOT CARE if that option increases in value, we have shares to take profit on.

If price moves to $75 my shares make that difference and the option I sold increases in value (loses money) however I would be fine exercising and selling that buyer my shares at $75 at expiration to take profit while still collecting the $710 in premium.

If for some reason price is anywhere below $75 on expiration day I would be even happier to collect their $710 and continuing holding this portion of my position. All I know is currently my shares closed at the high and the option I sold has lost $60 on top of that, fun for me, not for the buyer. 

If you want to increase your profitability and odds of success day in and day out you will learn to trade options with real value and stop speculating so much because guess what?

Options with real value actually make money even faster with less risk to theta meaning you can let them GROW!!! And that’s the whole point, isn’t it?