Positive theta strategies are considered one of the great strategies that work when the markets trade within a narrow price range. The beautiful feature of these versatile strategies is that they can be used by an investor who expects a bullish or bearish trend, as well as by a trader looking to achieve market neutrality.
Calendar Spread
The calendar spread strategy is suitable for traders who believe that the stock price will remain close to its current price when it reaches the specified expiration date. The calendar spread out of the money can be used by traders who believe the stock price will differ at expiration. One of the main advantages of using an out-of-the-money calendar spread is that it is less expensive than using an in-the-money calendar spread.
Example:
Buying six ABCD January 15 options at $70 per share
Selling six ABCD December 18 options at $70 per share
As time goes by and the stock moves towards $70 per share, the position becomes more valuable and generates a profit. This profit is fully realized if the stock price is approximately $70 per share on December 18. At that time (or before if you don’t smartly attempt to achieve the maximum theoretical profit), you can close the position by selling the calendar spread.
If the stock price does not align with your expectations, the calendar spread will lose value at the expiration of the December options (becoming worthless). You can hold the January options, hoping for a miracle, but it is often wise to sell the option and recover some of the cost of purchasing the calendar spread.
When implied volatility is relatively high, profits are greater than expected. When implied volatility is low, profits decrease.
Iron Condor
In addition to the calendar spread, you can adjust the strike price of the iron condor to compensate for your market expectations. In the following example, let’s assume there is a fictitious index trading at 1598 and you expect a bearish trend in the near term. This is just one example of a suitable iron condor.
Example:
Buying three INDX July 17 options at $1440 per index
Selling three INDX July 17 options at $1450 per index
Selling three INDX July 17 options at $1590 per index
Buying three INDX July 17 options at $1600 per index
Due to the bearish expectations, you can sell options that are already in the money (as in this example). If that bothers you, you can choose different strike prices. However, the commission for this iron condor is high because part of the options must trade above $5, meaning that your potential loss won’t be too large if your bearish expectations turn out to be wrong.
Some people recommend trading all four legs of the iron condor at once, but if you are really bearish, you can sell the call spread now, intending to sell the put spread after the market declines. But be cautious: if the market rises, you may not be able to sell the put spread, meaning your loss will be higher than it would have been – had you sold the put spread and collected some extra commission.
Butterfly
The idea of the butterfly is to buy a butterfly option in the money, but with a strike price that is intermediate, placed above the market when you are bullish, or below the market when you are bearish. This is a very inexpensive way to play your expectations.
Example:
You are bullish and ABCD stock is trading near $65 per share
Buying two ABCD December 18 options at $65 per share
Selling four ABCD December 18 options at $70 per share
Buying two ABCD December 18 options at $75 per share
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Source: https://www.thebalancemoney.com/using-positive-theta-strategies-when-bullish-or-bearish-2536660
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