A Lesson On Theta in AAPL

On Tuesday the eighth of February, I wrote this nationally published piece on Apple Volatility for TheStreet.  As I wrote the piece I heard complaints about the theta decay.  In theory, they were right, the straddle had over 25.00 a day of decay (see below).

However, as the days have passed the straddle has not lost cash, why?  As I have stated in the past, the Greeks aren't real.  That theta was based on the lowest volatility that AAPL had experienced in several years.  Even before the Steve Job's rumor (anyone who has a pulse knows rumors of Steve Job's being very ill have begun to surface), IV began to tick up.  Instead of decaying value, time essentially stopped.  With the Steve Jobs rumor AAPL IV hasn't just increased, it has exploded.  Thus we see a straddle that is priced around 22.00 (see below).

How is this possible?  AAPL has hardly moved, 10 days have passed, this trade should be a loser.  The issue, the Greek are an output… they are derived from something else.  Greeks do not actually change option values, they only measure risk.  Volatility on the other hand is an input.  When it changes so do the prices of the options and the Greeks themselves.  While time was passing, one can see, IV is up over 27% in March now.  The increase in volatility trumped the time decay function that is theta.  This is would allow us to be in the trade long enough to profit from movement (if we were gamma scalpers we would be making a killing).  Or, like this straddle, we could actually profit from the IV increasing so much that we do not even need the underlying to move.  Remember, inputs trump outputs, and in options…VOLATILTY STANDS ALONE!  This concept applies to all types of trades, spec, income and volatility plays.

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