• Appropriate strike is as important as predicting direction •
My biggest mistake today, I’m learning, was trying to scalp too far OTM options. Scalping OTM might be a viable strategy on 0DTE, but most of the time it seems there are far more elements working against you (particularly theta) from the start than if you were scalping ITM or ATM contracts. If I’m understanding correctly, the rate of theta decay to premium is higher the further OTM you are, meaning a greater % of the premium is lost to theta each passing moment the further OTM you are—which in turn means the underlying instrument must move disproportionately more to make up for theta decay in OTM options. Theta is smaller on OTM contracts, but it makes up a larger percent of the premium. I guess intuitively this makes sense—as time to expiration decreases, the probability that a far OTM option ends up ITM decreases. That probability is inversely reflected in the rate at which the premium loses value over time.
So with my far OTM strike play even though I was right on the direction, the rate at which the underlying was moving up was not high enough to neutralize the rate at which theta was eating away at my premium. Here is a break down of what plays at different strikes looked like across the 2 hour period after I placed my trade:
NVDA (underlying):
6:32am = $576.40 — 8:32am = $583.30 (+1.2%)
*NVDA 550 Call (ITM)
6:32am = $2,716 — 8:32am = $3,380 (+24.4%)
*NVDA 570 Call (ITM)
6:32am = $1080 — 8:32am = $1462(+35.3%)
*NVDA 605 Call (OTM)
6:32am = $93 — 8:32am = $74 (-20.4%)
Choosing an appropriate strike is as important as predicting the direction of the underlying stock. LEARN.