Different Option Strategies, Different Profit Drivers
Sep 13, 2023
With options, position profits always come down to three main things: direction, time, and volatility. Or more specifically, delta, theta and vega. But given the vast number of different strategies you could implement in the marketplace, from defined-risk to undefined-risk and directionally biased to directionally neutral, different strategies will inevitably have different drivers of profitability.
In other words, there may be strategies that are more dependent on direction to secure profits, and there may be strategies that are leaning more heavily on time to simply pass. While vega usually takes a backseat amongst the three, some strategies have delta as their profit driver, and some strategies have theta as their profit driver.
Strategies that inherently have a directional bias are naturally going to be delta-driven strategies. So, any time you want to implement a bullish bias in the market, and you execute a bullish option strategy to do that, that position is naturally going to be largely dependent on delta for profitability—the same being true for any bearish bias that is paired up with a bearish strategy.
Classic examples of delta-driven strategies would be long vertical spreads, short vertical spreads, or even short puts. With these strategies, profits can be realized quickly if the market accommodates, and the stock moves in the direction of the strategy.
Other strategies, however, do not naturally have a directional bias built into them, so they are going to be more theta-driven strategies. Any strategy that is more neutral in nature, and does not carry a directional bias, will be more dependent on theta for generating profits.
Good examples here would be iron condors or short strangles. With these strategies, profits will be much slower, as not only does delta not help profitability like it does in a vertical spread or short put, too much of a move in one direction can negatively affect profits. Iron condors and short strangles depend on time going by to be profitable—a process that simply cannot be rushed.
Jim Schultz, a quantitative expert and finance Ph.D., has been trading the markets for nearly two decades. He hosts From Theory to Practice, Monday-Friday on tastylive, where he explains theoretical trading concepts and provides a practical application of those concepts to a trading portfolio. @jschultzf3
Trade with a better broker, open a tastytrade account today. tastylive, Inc. and tastytrade, Inc. are separate but affiliated companies.
Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.
tastylive content is created, produced, and provided solely by tastylive, Inc. (“tastylive”) and is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, digital asset, other product, transaction, or investment strategy is suitable for any person. Trading securities, futures products, and digital assets involve risk and may result in a loss greater than the original amount invested. tastylive, through its content, financial programming or otherwise, does not provide investment or financial advice or make investment recommendations. Investment information provided may not be appropriate for all investors and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. tastylive is not in the business of transacting securities trades, nor does it direct client commodity accounts or give commodity trading advice tailored to any particular client’s situation or investment objectives. Supporting documentation for any claims (including claims made on behalf of options programs), comparisons, statistics, or other technical data, if applicable, will be supplied upon request. tastylive is not a licensed financial adviser, registered investment adviser, or a registered broker-dealer. Options, futures, and futures options are not suitable for all investors. Prior to trading securities, options, futures, or futures options, please read the applicable risk disclosures, including, but not limited to, the Characteristics and Risks of Standardized Options Disclosure and the Futures and Exchange-Traded Options Risk Disclosure found on tastytrade.com/disclosures.
tastytrade, Inc. ("tastytrade”) is a registered broker-dealer and member of FINRA, NFA, and SIPC. tastytrade was previously known as tastyworks, Inc. (“tastyworks”). tastytrade offers self-directed brokerage accounts to its customers. tastytrade does not give financial or trading advice, nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of tastytrade’s systems, services or products. tastytrade is a wholly-owned subsidiary of tastylive, Inc.
tastytrade has entered into a Marketing Agreement with tastylive (“Marketing Agent”) whereby tastytrade pays compensation to Marketing Agent to recommend tastytrade’s brokerage services. The existence of this Marketing Agreement should not be deemed as an endorsement or recommendation of Marketing Agent by tastytrade. tastytrade and Marketing Agent are separate entities with their own products and services. tastylive is the parent company of tastytrade.
tastycrypto is provided solely by tasty Software Solutions, LLC. tasty Software Solutions, LLC is a separate but affiliate company of tastylive, Inc. Neither tastylive nor any of its affiliates are responsible for the products or services provided by tasty Software Solutions, LLC. Cryptocurrency trading is not suitable for all investors due to the number of risks involved. The value of any cryptocurrency, including digital assets pegged to fiat currency, commodities, or any other asset, may go to zero.