One of the four “Option Greeks” you should know is called Theta and from that term comes another concept you should know called Theta Decay.
Another interesting option trading term I wish to explain is Theta or Theta Decay. Theta is a option trading term, which is also one of the “Option Greeks” which are important terms to understand to set trades up properly as in to win. Theta refers to the rate at which an option loses value. Thera is sometimes referred to as Theta decay. When you pick your strike price it will have a premium value and a Theta value. Theta is a number on the option and it tells you how much value your option loses each day. Theta is not constant and slowly increases a little as the Option ages. Some options have higher theta then others. In general the farther “OTM” or out-of-the-money the option is, the higher Theta is for that option. And In contrast the closer the option is to the money the lower Theta value is. In addition, because OTM have no intrinsic value, the premium is all extrinsic or time value, so Theta or Theta decay, which eats away at the option premium’s Extrinsic value every day at a slowly increasing rate. So Theta is the enemy of option buyers, because it decreases the value of their purchased option every day. Which is the same option they hope to sell for a higher price then they paid for it. In direct contrast, Theta is the friend of option sellers because the seller of options hopes the option decreases in value so they can buy it back cheaper, thus profit or it goes to zero and expires.
Theta decay is one reason that Options are loosely referred to as wasting assets, or assets which decrease in value or become smaller in price daily. Theta is thus a very important factor for both buyers and sellers of options. Theta is the enemy of option buyers, because it decreases the value of their purchased option every day. Which is the same option they hope to sell for a higher price then they paid for it. In direct contrast, Theta is the friend of option sellers because the seller of options hopes the option decreases in value so they can buy it back cheaper, thus profit or it goes to zero and expires. Theta is one of the four Option Greeks you should be familiar with, the others are delta, vega and gamma.
Happy Trading.
✍️ written by Shortsegments
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