Investing Assets & Markets Options Using Positive Theta Strategies When Bullish or Bearish Collect Theta and Express a Market Bias By Mark Wolfinger Mark Wolfinger Mark Wolfinger was an options market maker at the Chicago Board Options Exchange (CBOE) for over two decades. He’s authored several books, including "The Rookie's Guide to Options," now in its second edition. Wolfinger has a bachelor's degree from Brooklyn College and a Ph.D. in chemistry from Northwestern University. learn about our editorial policies Updated on March 4, 2021 Reviewed by Marguerita Cheng Fact checked by Hans Jasperson Fact checked by Hans Jasperson Hans Jasperson has over a decade of experience in public policy research, with an emphasis on workforce development, education, and economic justice. His research has been shared with members of the U.S. Congress, federal agencies, and policymakers in several states. learn about our editorial policies Photo: Michael H/Getty Images Market-neutral strategies earn a profit when time passes and the "magic" of time decay (Theta) does its thing. Of course, it is not as simple as opening a position and waiting for the profits to accumulate. There is always the possibility of a profit-destroying price change in the underlying stock or index. Nevertheless, these strategies work well when the markets trade within a narrow price range. The beautiful characteristic of these versatile option strategies is that they can be used by the bullish or bearish investor as well as by the market-neutral trader. Key Takeaways Calendars, iron condors, and butterfly spreads provide examples with positive time decay for the bullish or bearish investor.The calendar is used by traders who believe that the stock price will remain near its current price when a specified expiration date arrives.Just as you can shift the strike price of a calendar spread to compensate for your market bias, you can do the same thing with an iron condor.Instead of buying an at-the-money butterfly, buy one whose middle strike price is above the market when bullish, or below the market when bearish. Calendar Spread ABCD is currently trading at $65 per share. Believing that the stock price will rally towards $70 as the Dec. 18 options expiration date approaches, you buy an out-of-the-money calendar spread. Traditionally, the calendar is used by traders who believe that the stock price will remain near $65 when a specified expiration date arrives. But there is no reason why it cannot be used by traders who believe that the stock price will differ at expiration. One advantage of using the OTM calendar spread is that it is less expensive than an ATM (at the money) spread. Example: Buy six ABCD Jan. 15 70 callsSell six ABCD Dec. 18 70 calls As times passes and the stock moves towards $70 per share, the position becomes more valuable and you earn a profit. That profit is maximized if the stock is almost exactly $70 per share on Dec. 18. At that time (or earlier if you wisely do not attempt to earn the maximum theoretical profit) you close the position by selling the calendar spread. If the stock price does not conform to your expectations, then the spread will lose value as the December calls expire (and become worthless). You can keep your Jan uary calls, hoping for a miracle, but it is often wise to sell the call and recover some of the cost of buying the spread. When implied volatility is relatively high, the profits are even larger than anticipated. When implied volatility is low, the profits are reduced. Iron Condor Just as you can shift the strike price of a calendar spread to compensate for your market bias, you can do the same thing with an iron condor. In the following example, assume that an imaginary index is trading at 1,598 and that you are bearish over the near term. The following is just one example of an appropriate iron condor. Example; Instead of centering the IC around the current index price (~1,600), you may decide to center it around 1,520 to accommodate your bearish bias: Buy three INDX Jul. 17 1,440 putsSell three INDX Jul. 17 1,450 putsSell three INDX Jul. 17 1,590 callsBuy three INDX Jul. 17 1,600 calls Because of the bearish bias, you may sell calls that are already in the money (as they are in this example). If that bothers you, choose different strike prices. However, the premium for this iron condor is high because the call portion should be trading above $5—and that means your possible loss would not be too large if it turns out that your bearish prediction was wrong. Some would advocate trading all four legs of an IC at one time, but if truly bearish you could sell the call spread now, intending the sell a put spread after the market declines. But be careful: If the market rallies you may never get to sell the put spread, and that means your loss is higher than it would have been—had you sold a put spread and collected some additional premium. Butterfly You get the idea by now. Instead of buying an at-the-money butterfly, buy one whose middle strike price is above the market when bullish, or below the market when bearish. This is a very inexpensive way to play your bias. Example: You are bullish and ABCD is trading near $65 per share. Buy two ABCD Dec. 18 65 callsSell four ABCD Dec. 18 70 callsBuy two ABCD Dec. 18 75 calls Was this page helpful? Thanks for your feedback! Tell us why! Other Submit