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Ask Trader Guy: Truths about Long In-the-Money Verticals

April 28, 2015
Frederik Broden

Hey, Trader Guy! When I simulate long verticals on the Analyze page of thinkorswim, I see that some have positive theta. How can a debit spread that I pay for have positive theta? I thought only short option strategies had that?

Positive theta or time decay means that time passing benefits the position, all things being equal. When the debit of a long vertical is less than the intrinsic value of the long option, it’s possible for the long vertical to have positive theta. As time passes and the price of the stock doesn't change, the vertical will be worth the intrinsic value of the long option at expiration. Its value will grow from the debit to the intrinsic value, which means time benefits the position. Hence, it has positive theta.

Why do I sometimes see the VIX go up, the VXX go down, and vice versa? I would expect them to up and down together.

As products, the CBOE VIX and Barclay’s VIX Futures ETN (VXX) are related to implied volatility in S&P 500 (SPX) options, so you’re right. Intuitively, you’d expect them to move up and down together. But they don’t always, because of what they actually represent. The VIX is a pure-cash index that’s calculated directly from SPX option prices. VXX is an exchange-traded note (ETN) with a portfolio of /VX futures. /VX futures are the market’s expectation of future 30-day implied vol in the SPX. And while they’re related to the VIX, /VX futures move independently from the VIX. Because the VXX rolls a portion of its portfolio from the front month /VX to the next month, the basis between the /VX futures affects VXX as well. Because there are more factors impacting the VXX price, don’t be surprised if it moves in the opposite direction of the VIX on any given day.

I know some places have laws against texting while driving. But how about entering trades or checking quotes on the TD Ameritrade mobile app while I’m stuck in traffic?

I have to think that trading while driving is probably not the safest thing. I don’t do it myself. But a possible defense might be to show the arresting officer how you skillfully scalped bond futures at 55 mph. 

Investments in exchange-traded products like VXX that offer exposure to stock market volatility entail significant risk and are intended for sophisticated investors who actively manage their investments daily.

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