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Theta Burn, Charm, and Opex Cycles


The market tells a story.

And it's our job to listen.

One of the consistent themes I see in the market is the price action leading up and immediately following options expiration.

This price action is often magnified after a volatile move.

The Market Narrative

So here's the story: we see some ugly price action, so investors go out and buy a bunch of puts to protect themselves against further downside.

Except these investors are terrible at choosing which options provide the best protection. And because the market is moving lower now, we will often see a higher bid in near term options than further out in time as they don't want to pay up for the extra premium.

And that strategy will work, provided we do crash. But somehow, we end up magically finding support as we head into options expiration.

So these put buyers will not only face a drop in the value of their options through time decay, they also see a drop in the protection the put offers-- this effect is known as charm.

A bounce into opex will bring pain to many of these put buyers as the puts will then expire worthless, leaving them fully exposed to the downside again. They then face a choice of whether or not to pony up the cash and protect themselves again, or weather any more potential volatility coming their way.

Take The Other Side

And if you see this narrative taking place, you can be on the other side of the trade, selling shorter term premium and buying premium further out in time. That's why calendars (time spreads) are often a good bet in this market environment, provided you make it a little more directional.


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by Steven Place

Steven Place is the founder and head trader at