Options Jive

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Average Daily P/L & Theta

Options Jive

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

Today we dive into comparing how close theta decay is to daily P/L.

We see that theta decay in the first half of the trade can be used to gauge daily P/L as they are fairly correlated.

However, as we get into the second half of the trade, theta drastically overstates P/L. Why is this?

Gamma risk erodes at our P/L near the end of a trade, so even though theta increases, P/L is much more sporadic. This makes the case to manage winners early in order to avoid the exposure to gamma.

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