Remember that Theta is simply the time value of an option. If you have positive Theta, your option gains value over time and if you have negative Theta, your option loses value over time.
We can capitalize on the Theta farming strategy by theoretically selling the out of the money calls. Remember, a call spread is a simple option spread strategy when an equal number of call options are bought and sold at the same time.
Let's assume we sell a 17D Call. In the example below we would collect around $800 dollars, but our position would only be worth that much if the option we sold expired worthless:
Our option right now is worth negative $22.89, but we have a positive theta of 71.49. So everyday that the price doesn't move (all else being equal) the value of our option will increase by $71.
If we move the Time Decay slider on the left side of the screen up 9 days let's see what happens to our payoff curve. (the blue line is representing our P/L 9 days in the future, meaning time has decayed and we've collected Theta every one of those days - all else being the same, our option is now worth $567)
We are essentially harvesting yield on our collateral (in this case #BTC). There are many strategies to collect Theta, here is another one.
This is called a straddle, you can see that we have a positive Theta of 91, this means we will earn about $91 dollars a day if the price doesn't move past the short call or short put.
However you might notice that if it does move past either of those strikes you have unlimited loss on both sides. So you want to put this trade on when you expect volatility to be subdued, you also want to know how to manage this trade properly.
In 30 days, if all remains the same, we will have collected $2,362.
There are many strategies in which one can be long (have positive) Theta. But remember, when you are long Theta you are short Vega (Volatility) which means you need volatility to not move much or simply decrease.
LP pools are great if you know how to manage them, but few do and most lose out to Impermanent Loss. When you enter a pool you are basically short Vega and in the crypto world that's a dangerous thing to be.
What are some of your favorite ways to collect Theta?
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