Different Option Strategies, Different Profit Drivers
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
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