Theta
Candlefocus EditorThe Greek letter "theta" is used to denote the rate of decline in the value of an option over time. In options trading, time is an important factor to consider since the option contracts have a fixed expiration date. As time passes and gets closer to the expiration date, the greeter the theta and the greater the time decay of the option.
For long positions, theta is usually expressed as a negative number. This is because the value of the option will decrease over time due to time decay. If all other variables remain constant, the option's value will decrease by the same amount for each day up to maturity. This concept is known as time decay.
For example, if a trader buys a call option with a theta of -0.05 and the option was priced at $100, the option would lose $5 each day until it’s expiration. This is why it is important to be aware of the effects of time decay when considering any options trades.
Theta is an important concept to consider when trading options. Traders need to understand the concept and how theta works in order to make informed decisions and maximize their chances of success. By understanding the value at which an option will decay over time, traders can plan their tactics accordingly and try to profit from a trade before the theta ultimately causes the option to lose value.