What Is Theta When Trading Options? | Options Theta Explained
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Theta when trading options

What is Theta when Trading Options?

For new and seasoned options traders, it is always good to review foundational information. 

A term that you may have heard when it comes to trading options is theta. So what is Theta when trading options?

Theta is one of the group of measures known as the Greeks, and it is one of the factors used to determine the value of an option.

Other factors in this process include the difference between the stock price and the strike price, the duration of the option contract, the market volatility, and the implied volatility of the underlying security.

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Options Theta Definition

Theta is a measure used to describe the rate that an option’s value will decay with all other factors staying the same (price of stock and implied volatility).

Theta represents the daily time decay of the extrinsic premium.

Theta is usually expressed as a negative number as it is used to describe how an option’s value will depreciate as it matures.

As an option matures and moves closer to its expiration date, the theta value increases as well.

This means that the option’s value will decay at a faster rate as it gets closer to the expiration date.

Theta is a good basic options trading concept to understand; however too much analysis into this concept can affect your options trading decision-making process.

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Option Theta Example

If the current value of an option is 7.50 and the option has a theta of -.05. After one day, the option’s value will be 7.45, 2 days 7.40. Etc.

Is Theta Good for Option Traders?

Theta is something that benefits options sellers as it is directly tied to an option’s value.

When an option expires, option sellers are usually able to keep all of the premium.

For buyers, the opposite scenario is true. If you buy an option, theta is working against you, as the value of the option decreases over time. 

As an options buyer, there are many other factors that are working against you, and it can be difficult to make a consistent profit from buying options.

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Conclusion

If you’re new to options trading, theta is one of the fundamental concepts that you should understand. 

However, there are more important components to learn such as implied volatility, market volatility, and the difference between the market price and stock price.

These are all important factors that you should consider when you’re selling options.

Do you want more amazing advice related to options trading? 

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About the Author David Jaffee

I (David Jaffee) help people become consistently profitable traders while minimizing risk. I graduated from an Ivy League University and worked at some of Wall Street's most successful investment banks. Subscribe to my YouTube channel for valuable videos - BestStockStrategy YouTube Channel​. Finally, if you're looking to Land a Finance Job, then I've put together the best step-by-step course at LandaFinanceJob.com. My personal website is DavidJaffee.com.

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