How To Eliminate Options Time Decay When Buying Options

you've probably heard it a thousand times as soon as you buy an option time is against you in order to make money after buying that option you don't have a lot of time for your directional bet to work whether it's calls or puts so in this video I'm going to show you how to eliminate time decay the next time you want to buy options for directional bet so let's take a look at the SBY real quick and let's just pretend for a minute that we are bullish on the SP why because we're in an uptrend and we're having to pull back but ultimately we think this thing is going to go higher over the next few weeks so one thing that a trader might consider is buying a call option the problem with buying the call option is that time is against you when you buy a single call option and we don't really know exactly how long it will take for the market to go higher so even though I have a bullish you know thesis for this particular example it doesn't really mean that I know exactly when that's going to happen and the longer it takes for my foolish thesis to play out the more I can lose money with buying a single option let's go ahead and look at the option chain and let's let's see what we see here so I'm looking at the SP Y options and you can see that I'm going to just kind of look at the front month options and we're looking at all the strikes pretty much around the 234 we have we're trading at 233 86 but what you'll notice that no matter where you want go whether it's in the money or out of the money the theta column has a negative value and you can actually see even though you go deeper in the money you'll still pay six dollars a day for this particular option so let's just say let's look at the 232 for example if I buy the 232 call option because I think the market is going to go higher I'm going to pay 400 and you know four and thirty five hundred forty dollars for it and I'm going to start losing six dollars a day as I wait for the market to you know follow my whatever my thesis is in this case as the market going higher so what I want to sort of explain that you can eliminate this by simply selling a call option against your option basically making a call debit spread and by doing that we we can the time option and give ourselves time to let our bullish theses play out so let's go ahead and do that and see what that looks like in the chain I'm going to change this to a deep and wide for strike vertical just to you know give us some some whole number strikes I don't play these half strikes very much but you can see now that in the theta column for any one of these particular call debit spreads and now we're talking about vertical spreads that there is no time decay or very very little so we've eliminated a lot of them there's still a dollar here for this particular trade spread but you can see that we basically eliminated time decay so that we can have time for our bullish thesis to play out now for any one of these spreads as long as you're in the money the spread is going to be worth two dollars because that's the width of the strikes so at this point you can start looking at probabilities and you know how bullish you are but we'll save that for another video so by turning your single call option into a vertical spread or a call debit spread you are essentially able to eliminate theta to give yourself more time for your directional thesis to play out in this case it was a call option because we were bullish but it's the same on the put side so if you haven't done so already be sure to LIKE this video and subscribe to this channel for more vertical spread awesomeness my name is Eric and I'll talk to you soon

Channel: Stock Market Options Trading

Views: 25,257

Rating: 4.8996654 out of 5

Keywords: vertical spreads, bull call spread, call debit spread, options trading, vsa, options time decay, debit spread theta, how to trade options, debit call spread, debit spreads explained, options trading 101, options trading basics, options trading education, options trading explained, options trading for beginners, options trading for dummies, options trading strategies, options trading tutorial, trading option contracts, trading option spreads, trading options for beginners

Id: vTS5a0JliKQ

Length: 3min 41sec (221 seconds)

Published: Sat Mar 25 2017