The 6-Week Options Trading Kickstarter: Options Pricing Basics
Steve Smith breaks down the basics of options pricing.
Here are some other basic concepts you need to know about theta:
- An options theta can be calculated as follows: If a particular option’s theta is -10, and 0.01 of a year passes, the predicted decay in the option's price is about $0.10 (-10 times 0.01 is 0.10).
- At-the-money options have the highest theta. Theta decreases as the strike moves further into the money or further out of the money. In-the-money options are mostly composed of intrinsic value (the difference between the strike price of the option and the market price of the underlying), while out-of-the-money options have a larger implied volatility component.
- Theta is higher when implied volatility is lower. This is because a high implied volatility suggests that the underlying stock is likely to have a significant change in price within a given time period. A high IV artificially expands the time remaining in the life of the option, helping it retain value.
Here is a complete schedule for the 6-Week Options Trading Kickstarter:
1. What Are Options, and Why Should We Care About Them?
2. Options Pricing Basics
3. Meet the Greeks
4. How to use Options: Three Basic Principles
5. Covered Calls
6. Hedging, Portfolio Protection, and Avoiding Disaster
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