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Options Jive

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Does Theta Have Character?

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.

The answer is yes! Theta has 4 characteristics and we’ll name them all! Theta is the theoretical decrease in value of an option with the passage of one day. Tune in to hear Tom and Tony discuss theta’s characteristics!

4 Characteristics of Theta:
  1. Theta is larger for shorter duration options

  2. Theta is larger when IV is high

  3. Theta’s rate of decay increases as expiration approaches

  4. Theta decay is largest for ATM options

The first characteristic is that theta is larger for shorter duration options. This is one reason we like Calendar Spreads. When we set this up by being short the front month and long the back, this allows us to collect the theta differential as expiration approaches.

The next characteristic is that theta is larger when IV is high. High premium levels (and thus larger thetas) coincide with higher IV environments. With higher IV comes greater opportunity.

The third characteristic is that theta’s rate of decay increases as expiration approaches. The highest theta is for ATM options that expire soonest. However, we tend to avoid these options since the increase in gamma risks offset the advantages of a high theta.

The last characteristic is that theta decay is largest for ATM options. This is why we manage Straddles sooner than Strangles. Deep ITM and OTM options have less premium since they have a lower probability of their strikes being tested and thus have lower thetas.

Tune in as Tom and Tony walk you through 4 characteristics of theta in today’s Options Jive!

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