--- title: 'Most Traders Don''t Know a Debit Spread Can Have Positive Theta. Tom Preston Shows Why.' source: 'https://youtube.com/watch?v=6hAhSFyo89Y' video_id: '6hAhSFyo89Y' date: 2026-08-07 duration_sec: 281 channel: 'tastylive' --- # Most Traders Don't Know a Debit Spread Can Have Positive Theta. Tom Preston Shows Why. > Source: [Most Traders Don't Know a Debit Spread Can Have Positive Theta. Tom Preston Shows Why.](https://youtube.com/watch?v=6hAhSFyo89Y) ## Summary Tom Preston explains a counterintuitive options concept: a debit spread can have positive theta. Using real estate ETFs as an example, he walks through constructing a bearish put spread on IYR and demonstrates how buying out-of-the-money puts can generate theta decay in your favor. ### Key Points - **Interest Rate Rationale** [00:01] — Rising interest rates reduce housing affordability, which can pressure real estate ETFs. - **Three Major Real Estate ETFs** [00:13] — VNQ (Vanguard), IYR (iShares), and XLRE (State Street) are the three major real estate ETFs discussed. - **Options Liquidity Comparison** [01:35] — IYR shows decent open interest for options trading; VNQ and XLRE have thinner markets. - **IYR Chart Pattern** [01:49] — IYR had been rallying but recently declined, consistent with the bearish interest rate thesis. - **ETFs vs. Individual Stocks** [02:03] — Individual homebuilder stocks (Lennar, Hovnanian, KB Homes) have poor options markets, making ETFs preferable. - **Put Spread Construction** [02:45] — A put spread is constructed: buy the 106 put, sell the 105 put on IYR for a 47-cent debit. - **Trade Metrics** [03:17] — The spread has negative 10 deltas, 64% probability of making half max profit, and generates 22 cents of theta. - **Positive Theta Explanation** [03:33] — The 106 put has 81 cents of intrinsic value; the spread debit is only 47 cents. As time passes, the spread converges to intrinsic value, creating positive theta. ## Transcript the real estate ETFs I was looking at. And so here's the idea. The rationale is as interest rates start to climb, people can't afford to buy the houses. Real estate ETFs might start dropping. Okay, that's the basically is as much analysis as I do on this stuff. Um looking at a couple of the three of the big ones. Uh VNQ is the Vanguard the big ones. Uh VNQ is the Vanguard um real estate ETF. IYR is an I think it's a State Street maybe or iShares. X No, XLRE I think is the iShares. No, the names right here. Um IYR is the is the iShares real estate Um IYR is the is the iShares real estate uh fund. Uh XLRE is the State Street fund. Looking at the options in these state on these things. Let's look at VNQ. Um the markets aren't awful. There's some decent open interest. Um thousand, two thousand. Again, it's not like we're talking about the S&Ps, but it's VNQ. It's a it's a little real it's VNQ. It's a it's a little real estate ETF. Go into X Uh what is it? XLRE. XLRE. Um Again, markets aren't aren't bad. Um 10 cents wider than the 10 cents wider than the 45 puts. Again, for a for a you know, a a not heavily traded ETF, got the 49 days. Yeah, this is almost zero open interest in these things. And to the 49 days. What's the third one? IYR. IYR. Um and so just bearish ideas in these things. The There's a fair amount of open interest in IYR. We might be able to get filled in in a spread in here. So, I don't know. Anybody want to look at a chart of IYR? You know, it was rallying up, now it's down. Hardly a surprise. Like I said, when the when the interest rates go up, it's just never a good sign for housing. And I've been bearish on housing for a while. Um some of the individual names like Lennar or Hovnanian or KB Homes things like that. They they're kind of tough to trade. The markets aren't great in them. That's why I look at these these ETFs. You know, again, they're a little bit better. So, let's go and see what we could maybe be doing here. Stocks at 105. I'm not even going to look at the skew. Skew be damned. Um can look at the skew. Skew be damned. Um can I get some can I sell the 108 110? No, it's 2.0. It's I'm not getting enough credit for this. You know, I'm 16% actual volatility is fairly low. What if I pull this down to the 79? No. So, let's You know what? Let's do a put spread. So, one of the stocks at 105 20. Buy this buy the 106s sell the 105s. What am I getting for that? 47 cents. Okay. Here's the deal. I mean, look, it's a cheap bearish bet on IYR. That's all this is. Um decent open interest at these strikes. So, maybe you'll get filled 47 cents. Um very not not a big delta trade. Negative 10 deltas. Uh P50 probability making half 64% probability making half the max profit about 53. What 27 bucks? I would take that absolutely. And it's generating at 22 cents of theta. Let me just explain a because I love this theoretical stuff. That's my expertise. Um The 106 puts, buying those, um you know, you think gee, I'm buying a debit spread I should have uh negative theta. Yeah, that can be true. But when you're buying the out-of-the-money stuff. Um, the the the 106 puts or excuse me, the 106 puts have an eight or excuse me, the 106 puts have an eight have an intrinsic value of what, about um, 81 cents, but the debit of the spread is only 47. So, the idea is that if if IWR, I can't remember the symbol. If IWR just sits here at 105.19 over the next 21 days, that the spread will grow into the extrinsic the will grow into the extrinsic the intrinsic value of those 106 puts. So, it should grow, hopefully, from 47 cents up to 81 cents. That's the idea. So, that's why you're getting positive theta. We're starting this at 47. I give theta. We're starting this at 47. I give this a