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October 31, 2012 / redman59

Theta Burn and Position Update in $AAPL and $IBM

It looks like everything will be in full-swing on a market level tomorrow Wednesday.  I have nothing new to say that you probably have not read as far as news of Hurricane Sandy or market stats when it has been unexpectedly closed 2 days in a row.  Here in PA near Gettysburg we have flooded areas (only affecting houses near rivers, not towns) but no big damage like that seen in the news.  I wish the best for those with damage.

I do know from an options position standpoint that those that have positive theta positions will benefit.  We have seen an additional 2 days of theta decay that was not built in.  As far as my current positions go in $AAPL and $IBM, they should benefit from this time decay as I was short the weekly options in both and long the November options that expire on November expiration.  In my post on Friday I detailed the positions in $AAPL and $IBM and I wanted to show the Risk Profiles in both to show how the option greeks changed, mainly theta.

In $AAPL on Friday my Risk Profile looked like that below:

Now as of Tuesday night the greeks and Risk Profile look this below:

The main component here is theta.  As you can see with the added days of market closure as of Tuesday night the theta (time decay) has changed from 23.57 per day to 62.47 per day.  In theory and price and all else being equal, I have went from gaining $23.57 per day to gaining $62.47 per day while doing nothing and the markets were closed.  You can also see by the blue highlighted area above the 1 Standard Deviation range into Fridays (11/2) expiration.  This is telling me I have a 68% probability of $AAPL being in that area, making the downside near a max gain.  Now with the recent news of the firings and other patent/iPad-mini reviews who knows where $AAPL will be, but from a probability standpoint that is the expectation.

As for $IBM, it also caught some news during the market closure in that it issued a $5 billion dollar buyback in stock.  This can be seen as favorable news for the stock which should be favorable for the position I have as it is bullish in direction.  As of my last post the Risk Profile is below:

In the last post I stated that this was a 1/2 position as I have no faith in the bullish action of this market but based on prior action and a technical indicator (for analysis click here) I thought that $IBM would see some upside, benefiting this options strategy.  But if we saw some downside my plan was to add another Call Calendar or roll the short strike.  As of Tuesday night you can see this Risk Profile below:

Again focusing on theta as this position benefits from “lost days” or time/theta decay you can see that it went from 30.68 to 50.76 in those unexpected 2 lost days, benefiting the position around $50.  Again this is with all else (price/greeks) being equal.

I am sure that the Risk Profiles will change on Wednesday’s open as there is a lot going on now in the market with end-of-month mutual fund scrambling and news affecting these two stocks specifically.  Either way it should make for an interesting day and these positions should make for a good study on option greeks, specifically theta.

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