Basic knowledge of options, Part 3 (Theta)
Theta indicates the sensitivity of option prices to time changes, that is, the degree of price change of options per unit time. Theta is negative, and the time value of options will decrease as time goes by.
In daily transactions, theta has more basic application value than gamma, vega, etc., so I will talk about it first.
For unexpired options, the time value is generally positive, and in rare cases, the time value of options is negative. Then this kind of option with a negative time price is more valuable to the buyer, but it is garbage to the seller.
How to measure the speed at which the time value of an option is consumed? Theta is the measurement indicator.
For example, a call option with a price of 160, an expiration time of 12 days, and a theta value of negative 7.12, what does this mean?
The time value is 7.12 times 12, 85.44. The time value loss rate of this option will consume half of the time value in 12 days.
Of course, before the option expires, the consumption of time value will accelerate and the theta value will increase.
Based on the size of theta, we as option sellers can determine the daily time value gain once sold.
If we are buyers, we can also determine the daily option value loss.
Therefore, it is very important to choose options with suitable theta values according to your market role.
