TJ 145: Types of Traders

Join Matt and Gino for their discussion about the differences between delta traders and theta traders. There are two major greeks in trading: delta and theta. Delta represents directionality of a trade and its probabilty of profit, while theta represents time decay in an option trade. There are two other greeks, as well; vega and rho. They aren't covered as much, but vega represents volatility movement while rho represents interest rate change. As you can imagine, rho doesn't get much attention of late. In a way, delta and theta trading also represent different trading styles, as well. Directional trades require reasonably frequent maintenance to ensure they stay in the money and fine-tuning should a particular security start going the opposite direction. They can score homeruns, but can require a fair bit of work. Options, on the other hand, earn you cash flow so long as they're active. Provided you're the seller of an option, and it's set up correctly, it will have a decent percentage chance of expiring worthless for who bought it; leaving you with some cash in your portfolio. Even if you get assigned (that is to say the option doesn't expire worthless and the buyer takes your security), you *still* get paid even then. Granted, you'll have to go purchase that given security again if you want to stay in it, but that's just how it rolls sometimes. That's not to say selling options is strictly easy. It does require training to do correctly, and doing it wrong can easily destroy your account (particularly if you start trading naked puts without knowing what you're doing). Also, if a particular option looks like it will be exercised come expiration time and you *don't* want to exit the security, it can cost some time and capital to fix.