The 6-Week Options Trading Kickstarter: Meet the Greeks!
Steve Smith breaks down delta, theta, vega, gamma, and rho.
Theta is the expected percentage change in an option’s price for a one-unit change in time. Options are a decaying asset in that their value decreases as time passes. This can work in your favor if you are short an option, or against you if you are long an option.
Theta, or time decay, is not influenced by any of the other variables, but it is defined on slope. That is, it accelerates as expiration approaches. You can look back at last week’s article on options pricing for a more in-depth discussion of how theta is defined on a square root.
For example, the at-the-money $20 call for Fusion-io (NYSE:FIO) that has 30 days remaining and expires on August 18 has a theta of -0.03, meaning the call option will lose $0.03 of value for each day that passes. With the option priced at $1.70, that is 1.76% of decay per day. By the time there is only one week, or seven days until expiration, that option will be losing $0.05 per day in time decay, which on the then-expected price of $0.68 per contract, represents 7% decay per day.
These numbers assume all other variables, such as stock price and implied volatility, remain the same. You can play with various time frames and inputs using this options calculator.
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