The One Number That Tells You Which Option to Sell

COMCAST

The strategy involves selling naked short puts on Comcast (COMCAST) at a strike price of $23.50. The capital requirement is based on the stock price and remains relatively stable across different expiration dates. The focus is on generating theta decay, with a target return of 1/10 of a percent per day on the capital used. The trade is valid as long as the theta return meets the benchmark, and it is considered a short-term strategy due to the daily decay of the options' value.

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The speaker suggests that by selling short puts with a capital requirement that allows for a 0.1% theta return per day, traders can generate consistent theta income. This is achieved by managing a portfolio of multiple short put trades, which can offset directional losses with the steady theta gains. The example given involves selling a 23 put with a capital requirement of $427, generating approximately 0.3% per day in theta returns. The speaker emphasizes that while individual trades may have directional losses, the overall portfolio can benefit from the steady theta generation.

Theta and Capital Requirement Relationship

The capital requirement for selling naked short puts is based on the stock price and is a percentage of it. The capital requirement does not significantly change with different expiration dates or volatility changes, as it is primarily determined by the stock price. The focus should be on the theta generated, which is the decay of the options' value over time. A benchmark for theta return on capital is 1/10 of a percent per day, which translates to 10 cents per day on $100 of capital.

Theta Generation Through Short Put Strategies

The speaker explains that short put strategies can generate consistent theta (time decay) income, which can be a steady source of returns when combined across multiple trades. The key is to manage the portfolio with a focus on theta generation, even if individual trades may have directional losses. The theta return is calculated as a percentage of the capital requirement, with 0.1% of $100 being 10 cents per day. By scaling the number of trades, the overall theta return can be increased, though it does not guarantee high returns due to market volatility and directional losses.

What kind of returns should you be looking at based on theta and the capital you put up?

The return based on theta and capital is measured by the theta return on capital, which is a benchmark of 1/10 of a percent per day. This means that for $100 of capital, the trader should aim for a 10-cent theta return per day.

TakeawayThe trader should aim for a theta return of 1/10 of a percent per day on the capital used.

What is the capital requirement for a short put strategy?

The speaker mentions that the capital requirement for a short put strategy is $100, and 1% of that is 10 cents of theta per day.

TakeawayThe capital requirement for a short put strategy is $100, and the theta return is calculated as a percentage of that capital.