When I first encountered a positive model theta in IB, I thought there must be some mistake - theta is always negative right? I looked all around online but couldn't find a good explanation for this. So I ran my own analysis using Bjerksund-Stensland in C# (which was a good learning exercise). I plugged in the numbers and the model price aligns with the actual mid price. So far so good.
I used the highlighted option (AGNC, exp 01/17/2020, strike 19) and I ran the model each day from now until expiration, and simulated a price drop on the ex-div dates of the current dividend. This is the "neutral case" which assumes no net price movement in the stock (other than from the dividend).
The "actual" theta is -0.00431 to -0.00417 throughout the option life (IB and other brokers can't seem to separate this value out, but I wanted to know it), however the monthly dividend creates a "dividend effect" of 0.00533 per day (average). If you combine these together you get an annual gain of about 0.374 (vs. 3.20 option price) or about 11.7% (the stock's div yield is 12.7% currently). The option value is charted below as time passes from this simulation. I am aware the actual market prices in the dividend as it approaches so it would be smoother than this in reality, but it demonstrates the two forces of the dividend vs. time decay.
As the call value at this strike is negligible (model = 0.00) I believe the the put's internal sort of "yield" is approximately the yield of the stock minus the risk free rate (I think that's expected by put-call parity). The IB provided theta value * 365 is about 9% over the cost of the option, so I think the true return is somewhere in between (probably a bit lower than the 11.7% I calculated, but over 10%).
So, it makes sense in a highly leveraged portfolio (portfolio margin) at IB to use the option with the highest positive theta relative to the option price to hedge the long stock position. All parts of the hedge have a high positive return after accounting for IB margin borrowing costs.
I used the highlighted option (AGNC, exp 01/17/2020, strike 19) and I ran the model each day from now until expiration, and simulated a price drop on the ex-div dates of the current dividend. This is the "neutral case" which assumes no net price movement in the stock (other than from the dividend).
The "actual" theta is -0.00431 to -0.00417 throughout the option life (IB and other brokers can't seem to separate this value out, but I wanted to know it), however the monthly dividend creates a "dividend effect" of 0.00533 per day (average). If you combine these together you get an annual gain of about 0.374 (vs. 3.20 option price) or about 11.7% (the stock's div yield is 12.7% currently). The option value is charted below as time passes from this simulation. I am aware the actual market prices in the dividend as it approaches so it would be smoother than this in reality, but it demonstrates the two forces of the dividend vs. time decay.
As the call value at this strike is negligible (model = 0.00) I believe the the put's internal sort of "yield" is approximately the yield of the stock minus the risk free rate (I think that's expected by put-call parity). The IB provided theta value * 365 is about 9% over the cost of the option, so I think the true return is somewhere in between (probably a bit lower than the 11.7% I calculated, but over 10%).
So, it makes sense in a highly leveraged portfolio (portfolio margin) at IB to use the option with the highest positive theta relative to the option price to hedge the long stock position. All parts of the hedge have a high positive return after accounting for IB margin borrowing costs.