Ok let's put together so we can see a clearer picture for dream's GS trade:
For a 5 contract trade the Net Position Delta would be -42.95
For a 5 contract trade the Net Position Theta would be $81.65
Let's add GS expected move calculation to the above position:
GS ATM Implied Volatility = 28.78%
GS Stock Price at 21/12/2009 = $165.45
Daily EM = 28.78% x $165.45 x 0.06 = $2.85
If we look at our delta number, we see that each day we expect to lose approx $122.41 (position delta multiplied by daily expected move)
However every day we expect to make $81.65 as this is the position theta. As time passes, that theta value will increase (due to the exponential effect of time decay), meaning that we increase the rate at which the trade improves in overall position value even though we lose due to option delta going against us.
Let's fast forward to today...
Our mock GS trade would now have the following delta and theta values:
GS last stock price: 174.26
Net Position Delta: -209.11
Net Position Theta: 108.98
Our loss due to delta has increased since our Short 175 Call strike is being threatened by GS latest bullish run. However the total position is still in profit due to two factors:
Time decay in BOTH short options have allowed us to enjoy the benefits of theta.
With the stock price away from the Short $160 Put strike, we also enjoy profit from the value of the option losing value as the stock price moves away from the strike.
I'll now let dream finish the story with how it turns out...