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What Is Theta And Why Is It A Traders Worst Nightmare? Find Out Before It’s Too Late

ETF Watchlist

If you’ve been keeping an eye on the market in search of a good swing trade to make, chances are you’re not having too much fun. Most of what traders and investors have been treated to is chop, and for traders, especially swing traders, this is about the worst thing that could happen to this longer-term strategy.

Chop eats away at your options contract value if the implied move doesn’t come as expiration approaches. Experienced traders know this effect as time decay, or Theta. What Is Theta? The term “theta” refers to the rate of decline in the value of an option due to the passage of time. This means an option loses value as time moves closer to its maturity, as long as everything is held constant.

With chop, this is exactly what happens and why it’s a traders worst nightmare. You may have done all your homework, found a great setup, and applied a reasonable trade, but if the stock doesn’t make a meaningful move toward your strike price, you’d be better off cutting your loses and waiting for a break out of the range the market is in.

We thought CPI, which was released earlier in the week, would finally break us out of this range, but as we all know, any break was only temporary before falling back into this defined range we have been hovering in for quite some time now.

However, there is one trade that we have been watching for a while that is giving some signs of life.

iShares 20+ Year Treasury Bond ETF (TLT)

For the past six months, the price of TLT has also remained in a range, not breaking lower or higher, despite the Fed continuing to raise rates. The value of TLT works in an inverse direction of rates. Meaning, if rates rise, the value of TLT is likely to decline. However, if rates decline, the value of TLT should rise.

Since rates are continuing to steadily rise, one could keep TLT on their watchlist for a short play. If, however, the Fed was to cut rates like has been the rumor for later in the year, a long play could be entered in anticipation of that. For now, it is best to add this to your watchlist as my Smart Trades students and I have for the past several months. Be sure to join us to get in on all the action for when that time comes and to not miss out on all the other trades we will make in the meantime.

Join my Smart Trades options trading service today to see exactly how my students and I trade these types of scenarios! Smart Trades is where I teach my students how I trade options on some of the largest ETFs on the exchange. As you learn, you’ll get exclusive access to all my trades with notifications any time one is put on. Now, you can learn how many use this high-income skill to achieve financial freedom. Join today!

Good Luck With Your Trading!

Christian Tharp, CMT

This post was originally published on Wealthpop