By Melody
We are hoping this to be an easy and simple lesson to introduce options to you. By following Options Basics' articles, you should be able to understand options and how to utilize options to either profit or protect your stock.
This is the third part of "Meet the Greeks" if you are new to this part, please click here: Delta, Gamma to catch up first!
Theta
Time decay, or theta, is the number one enemy for the option buyer. On the other hand, it's usually the option seller's best friend.
I personally think theta is the least complicated member of the greeks of option.
Theta is the amount the price of calls and puts will decrease (at least in theory) for a one-day change in the time to expiration.
As time passes, the time value of options will "melt away". Furthermore, not only does the time value melt away, it does so at an accelerated rate as expiration approaches.
If you look at the screenshot above, you will notice that at-the-money options have the highest theta. This is because at-the-money options have the most time value built into the premium. And the bigger the chunk of time value built into the price, the more there is to lose.
Please stay with us for more on options basics!
Please stay with us for more on options basics!If there is anything that you didn't understand in today's Options Basics article, simply leave a comment below and we will try to explain more to you!
Comment(2)
Interesting to learn about this.
This one needs more work on a more clearer explanation all the others were great
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