We’ve all been there. We bought an FD on TSLA because we thought it was going to the moon, but we were off by a day, or even just a couple of hours. We sit there and watch as TSLA trades sideways and we lose money to theta. By the time TSLA wakes up and starts to move upwards, our FDs are so down that we barely break even or sell for a loss.
But what if I told you that there was a way to never have to worry about theta ever again? Yes, it’s true. You can enter a directional bet and not have to ever see your options go down even as the price goes up.
Enter debit spreads:
Spread strategies in options trading typically involve buying one option and selling another of the same class on the same underlying security with a different strike price or a different expiration. However, many types of spreads involve three or more options but the concept is the same. If the income collected from all options sold results in a lower monetary value than the cost of all options purchased, the result is a net debit to the account, hence the name debit spread.
The advantage of debit spreads:
minimal/zero exposure to theta
limited downside risk
cheaper than buying calls
disadvantage to debit spreads:
higher commission fees
higher risk of a bad fill when you close the position
limited upside potential