Boca_Bobby Basics

[boca_bobby]

Got a PM about our GS contracts.

"Why would the contract price go down when the stock price went up by over $3 per share today on GS?"

Not sure if you know much about the "Greeks." They are measurements that help us with price and time decay. In the case of GS, it was the time decay factor known as theta.

We went with the weeklies for our GS play. It expires on Friday. So we really didn't have much time to get over the $140 strike price. We still have trading for the rest of today and Thursday and Friday.

I sold for a small loss only because I still wanted to keep our February goal still in tact. There is still a chance we move above the $140 strike price but I wasn't willing to risk waiting for it. When we take a trade we really need to do more than just buy a contract and think it will automatically go up if the stock price goes up. We should start with a simple formula.

(Strike Price) + (Contract Price) = Break even Price

I will use my buy for illustration purposes.

($140 Strike Price) + ($1.17 Contract Price) = $141.17

This means the underlying price of GS must reach $141.17 just for me to break even. Anything above that would be my profit. The very next thing we need to ask ourselves is very critical.

"Can GS get over $141.17 by expiration?"

As of this post the price of GS was $139.28. We would need another 1.4% by expiration. That doesn't seem like a whole lot but let's also remember the enemy of our contracts.

TIME!!

Theta will erode the contract price more and more as each minute of the clock ticks forward. If the stock price settles in here and trades sideways for just up slightly and then down slightly it really doesn't matter to "the theta monster." He will take his share.

Think of Theta as your local area loan shark that shows up every hour on the hour to get paid! That stock price better go up so you can pay that beast or he'll break your legs!