Last time I gave you five checks before any options trade. Check 3 was rent. It is the one most people skip, so this issue is about it.
Stock vs option
When you own a stock, you own a share of a company's profit. If the stock goes nowhere for a year, you lose nothing but time. You can wait.
When you buy an option, you own a chance that the stock moves your way before a date. That chance loses value every day. Theta is the name for that daily loss. I think of it as rent.
My own numbers
I checked every trade I closed from July to October.
30 days or less: 40 trades, 52% winners, about break even.
More than 30 days: 19 trades, 26% winners, a clear loss.
The long holds caused almost 90% of the losses. In most of them I kept paying rent and waited for the market to see what I saw. Rent is the price of being early.
How to measure rent: three numbers
1. Per day. Your broker shows theta for each option. Multiply by 100 and by the number of contracts. Theta of 0.04 on one contract is about $4 a day.
2. Per month. Do not just multiply by 30. Rent rises as expiry gets closer. Better: open an options calculator, keep the stock price and volatility the same, move the date 30 days forward, and see what the position is worth.
3. As a percent of what you paid. Monthly rent divided by the cost. This is the number that matters. It tells you how fast the trade dies if nothing happens.
An example with round numbers
The stock trades at 100. You buy one 100 call with 60 days left for $5.00. Cost: $500.
Day one theta is about 0.04, so about $4 a day.
If the stock sits at 100 for 30 days, the call is worth about $3.55. You paid $145 of rent, 29% of the position, in one month.
If it still sits at 100 in month two, the call expires worthless. That month costs $355.
Same stock, same flat price. The second month costs more than twice the first.
Now compare a long dated option. On CoreWeave in late October, the January 2028 $60 call cost $22.40 and the January 2029 $60 call cost $29.05. The extra year cost $6.65, about 55 cents a month, under 2% of the option per month. Far from expiry, time is cheap. Close to expiry, it is expensive.
When high rent is fine
High rent is not always bad. It is fine when the catalyst is close. If earnings are 10 days away and rent is $4 a day, you pay about $40 to hold the trade into the event.
It is a problem when the catalyst is far away or has no date. If you expect the move in three months and pay 29% a month, most of your money is gone before the thesis is tested.
A simple test: multiply your monthly rent percent by the months until your catalyst. If that eats most of what you expect to make, the structure is wrong. Buy more time, sell a shorter option against it to collect some rent back, or wait.
How to use this
Open your options positions. For each one, write rent per day, per month and as a percent. Next to it, write the date of the catalyst. If the rent runs out before the date, you know what to fix.
The holding numbers come from my October recap. The full CoreWeave example is in my post on LEAPS options.
Regards,
Iskan