SteadyOptions is an options trading forum where you can find solutions from top options traders. TRY IT FREE!

We’ve all been there… researching options strategies and unable to find the answers we’re looking for. SteadyOptions has your solution.

Options Greeks: Theta For Time Decay


The options theta is a measurement of the option's time decay. The theta measures the rate at which options lose their value, specifically the time value, as the expiration date gets closer. Generally expressed as a negative number, the theta of an option reflects the amount by which the option's value will decrease every day.

In other words, an option premium that is not intrinsic value will decline at an increasing rate as expiration nears. 

The Theta is one of the most important Options Greeks.
 

Negative theta vs. positive theta

 

Theta values are negative in long option positions and positive in short option positions.  Initially, out of the money options have a faster rate of theta decay than at the money options, but as expiration nears, the rate of theta option time decay for OTM options slows and the ATM options begin to experience theta decay at a faster rate. This is a function of theta being a much smaller component of an OTM option's price, the closer the option is to expiring.

 

Theta is often called a "silent killer" of option buyers. Buyers, by definition, have only limited risk in their strategies together with the potential for unlimited gains. While this might look good on paper, in practice it often turns out to be death by a thousand cuts.

 

In other words, it is true you can only lose what you pay for an option. It is also true that there is no limit to how many times you can lose. And as any lottery player knows well, a little money spent each week can add up after not hitting the jackpot for a long time. For option buyers, therefore, the pain of slowly eroding your trading capital sours the experience.

 

When buying options, you can reduce the risk of negative theta by buying options with longer expiration. The tradeoff is smaller positive gamma, which means that the gains will be smaller if the stock moves.

 

Option sellers use theta to their advantage, collecting time decay every day. The same is true of credit spreads, which are really selling strategies. Calendar spreads involve buying a longer-dated option and selling a nearer-dated option, taking advantage of the fact that options expire faster as they approach expiration.

 

 You can see the accelerated curve of option time decay in the following graph:

 

Options Greeks: Theta For Time Decay

 

As a general rule of thumb, option sellers want the underlying to stay stable, while option buyers want it to move.

 

 List of positive theta options strategies

 List of negative theta options strategies

  • Long Call
  • Long Put
  • Long Straddle
  • Long Strangle
  • Vertical Debit Spread


Watch this video:

 

 

Related articles:


Want to learn how to put the Options Greeks to work for you?


Start Your Free Trial

What Is SteadyOptions?

Full Trading Plan

Complete Portfolio Approach

Diversified Options Strategies

Exclusive Community Forum

Steady And Consistent Gains

High Quality Education

Risk Management, Portfolio Size

Performance based on real fills

Try It Free

Non-directional Options Strategies

10-15 trade Ideas Per Month

Targets 5-7% Monthly Net Return

Visit our Education Center

Recent Articles

Articles

  • Is This Rally for Real?

    After being down over 35% from the all time high, S&P 500 has rallied over 20% from the recent lows in just two weeks. Is this rally for real? Or is it just a bear market rally, a "dead cat bounce"? What the "experts" are saying? Has the market bottomed? Will the selling resume?

    By Kim,

    • 0 comments
    • 121 views
  • Financial Planning Lessons From the Pandemic

    The first quarter of this year will end up being one of the most volatile quarters of our investing lives. Many lessons can be learned. Perhaps none are more important than the basic principle of maintaining sufficient cash liquidity in the form of an “emergency fund” during both our working and retirement years.

    By Jesse,

    • 0 comments
    • 88 views
  • Human Nature and Option Risk

    Traders may tend to think of risk in purely mathematical terms. It can be quantified by analysis and by a deep understanding of probability. But there is more to this than just the math, and for options traders, some of the intangible considerations might have more impact on trading decisions than the formulas.

    By Michael C. Thomsett,

    • 0 comments
    • 164 views
  • Anchor Analysis and Options

    Anyone who has been trading the Anchor Strategy over the past few months should be extremely happy with its performance.  Now that many have realized how well it performs in down markets, one of the most common questions is “what should I do now?”

    By cwelsh,

    • 0 comments
    • 84 views
  • Discount Stock Shopping In High Volatility Markets

    The COVID-19 pandemic has rocked markets over the past month. The fear of the virus, the fear of the impact on global economics from the mitigation taken on by governments, and, finally, the fear of "what’s next" has propelled the VIX.

    By Drew Hilleshiem,

    • 0 comments
    • 387 views
  • The Fallacy of Market Timing

    The headlines say it all. "The worst day since the financial crisis". "Markets in turmoil". And today was "Stock markets post best day in years as governments fight coronavirus with cash". Could anyone predict the crash? And can anyone tell us where we are headed next week/month/year? Is it possible to call the tops and the bottoms?

    By Kim,

    • 0 comments
    • 320 views
  • Long Option Risks

    Among all options, the most easily calculated payoffs are those for long options. But there remains a great misunderstanding, even among experienced option traders. This must be clarified before moving forward. The misunderstanding is often seen expressed online and in the literature: “75% of long options expire worthless.”

    By Michael C. Thomsett,

    • 0 comments
    • 364 views
  • Option Payoff Probability

    Many options analyses focus on profit, loss and breakeven. These show what occurs on expiration day, assuming the option remains open to that point. But this is not realistic. Most options are closed or exercised before expiration, is calculation of how probable a payoff is going to be, how likely the loss, or the exact neutral outcome (breakeven), are all unrealistic.

    By Michael C. Thomsett,

    • 0 comments
    • 466 views
  • Value of Trend Following During Periods of Market Volatility

    Our trend following system looks at two things when planning a position. The first piece is obviously the direction of the trend.  Does the system signal up or down?  The second piece of a position plan is how much risk we are going to take. 

    By RapperT,

    • 1 comment
    • 1,035 views
  • Intrinsic vs. Extrinsic Value

    A lot is written about intrinsic value, but how does it work and what does it mean? The fact is, intrinsic value is an estimate of how future premium levels will change. It is base don current volatility and a set of assumptions. In dividing premium into its component parts, most descriptions deal with intrinsic and time value.

    By Michael C. Thomsett,

    • 0 comments
    • 520 views

  Report Article

We want to hear from you!


There are no comments to display.



Your content will need to be approved by a moderator

Guest
You are commenting as a guest. If you have an account, please sign in.
Add a comment...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

Loading...

Options Trading Blogs Expertido