precarious. His negative delta increases. His negative gamma increases. His
goal becomes more out of reach. In conjunction with delta and gamma,
theta helps Brendan decide whether the risk is worth the reward.
In the new scenario, with the stock at $64.50, Brendan would collect $18
a day (1.80 × 10 contracts). Is the risk of loss in the short run worth earning
$18 a day? With Johnson & Johnson at $64.50, would Brendan now short
10 calls at 0.75 to collect $18 a day, knowing that each day may bring a
continued move higher in the stock? The answer to this question depends on
Brendan’s assessment of the risk of the underlying continuing its ascent. As
time passes, if the stock remains closer to the strike, the daily theta rises,
providing more reward. Brendan must consider that as theta—the reward—
rises, so does gamma: a risk factor.
A small but noteworthy risk is that implied volatility could rise. The
negative vega of this position would, then, adversely affect the profitability
of this trade. It will make Brendan’s 1.10 cover-point approach faster
because it makes the option more expensive. Vega is likely to be of less
consequence because it would ultimately take the stock’s rising though the
strike price for the trade to be a loser at expiration.