With crude down 3% as I write it seems we got lucky on our exit but don’t let this distract from, how in my opinion, this trade wasn’t managed very well.
As with any option spread that has a negative theta value as time passes you lose money, as the expression goes you have to pay to play.
When trading a ratio spread from the short side, you’re long a multiple of out the money options vs short an at or slightly in the money option you will be subject to theta decay from the part of the spread that is long the out the money options.
The closer to expiration the option gets the larger this decay gets on an exponential basis as such holding the position gets more expensive.
Take the crude option spread we had on, it moved up from our entry at 0.92 per unit to over 4.00. Now around the 22nd Feb 2019 the theta stood at -0.048 roughly 5 ticks (50$) per day per unit.
Crude then proceeded to sell off & trade in a sideways range, we didn’t book our gains & left the trade with the thought that we may see a rally back up. Now by doing this we compounded our mistake, not only did we not book some solid gains we gave back 2 weeks worth of theta (& no theta decay doesn’t take the weekend off). So we lost roughly 13 days of decay at ~ 5 ticks per day on 20 units = $13,000.
There is a very fine line even when swing trading option spreads & it is easy to get complacent when a large winner falls on your lap because you have to always be cognizant of how your position Greeks are affecting your bottom line.
Any questions please don't hesitate to ask.