I thought I would get this section up and running by starting a discussion thread on my favorite style of trading - profiting from positive theta or time decay. On a monthly basis I write various Calendars, Iron Condors, Diagonals, Double Diagonals and Broken Wing Butterflies.

I primarily use high volume index products like the SPY, IWM, QQQQ, and DIA. I also like the EEM, GDX, XLE, XEO, OIH as well as the RUT, SPX and MNX. I prefer indexes to equities for these type of strategies because it eliminates risk event to a large degree. I will use individual equities, but on a limited capital allocation basis.

The key from my perspective is having a well defined trading plan in place which plans out a course of action before price starts to move against the position. The real edge in this style of trading comes from the risk management and adjustment implementation.

Let's first look at calendars - the selling of a front month option and the buying of a back month option. My criteria for this type of trade is to place a calendar with a time horizon of 30 to 150 days before expiration. It is important to remember that Calendars have positive vega (they increase in value as volatility rises and they lose value as volatility decreases). I look to close a calendar or roll the short positon out one month in the last 10 days before expiration with a hard rule not to carry a short postion beyond Wednesday of expiration week.

If this seems to be a topic of interest, I would be happy to share more about my strategies and hopefully learn from others as well. An example of a recent closed trade is one that I did yesterday as the market was dropping in price and volatility was rising. In early Feb. I placed a MarQuarter (expires March 31)/May Put Calendar on IWM. The calendar cost me $1.04 and I placed the Calendar with IWM at 71.20. Yesterday, I closed the position for $1.44. Excluding commissions, that is almost a 40% gain in approximately three weeks. Not bad for what I consider to be a relatively low risk trade.