An Options Trader MUST understand Theta Decay
Theta Decay for Options is like buying a shiny new car and watching it depreciate in value as soon as you drive it off the lot.
When you purchase something for resale you hope to buy it at wholesale and then resell it for more than you paid (capitalism). That is the goal trading options. It can happen when you get direction right and price outruns what you paid for the option. Contrary to what a lot of pundits say, you can make profits buying options.
In layman’s terms an option will decay in value based on its number of days until expiration with price paid for the option divided by the number of days until expiration. Expiration several days out can buy time for your option trade to play out?
Let’s say you pay $2.00 ($200.00) for an option that expires in 30 days. As a rule it will decrease in value at minus $6.66 per day ($200 ÷ 30 DTE = -$6.66 per day). An option with 0 DTE (Zero Days Until Expiration) can go to Zero rather rapidly unless you have volume and movement in your trade direction that outruns Theta Decay. Options decay faster the closer they get to expiration (the above is a general rule).
If you Sell an Option, Theta Decay will move at the same rate as above and again, if direction is right, you may be able to Buy it back for less than you were paid. However, we only recommend selling options as a spread in order to limit risk which would be the amount of the spread less what you received in payment for the short spread (not recommended unless you are a seasoned trader willing to accept a lot of risk).
The part of an option that decays is that portion which is basically (OTM) Out-Of-The-Money) known as Extrinsic Value, VERSES actual value which is termed Intrinsic Value. Options bought ITM therefore decrease at a slower rate because of Intrinsic Value than those bought OTM (Extrinsic Value).
In any event, your goal as a trader is to get direction and movement correct so that your paid option price increases in value if bought and decreases in value if sold.
There is a lot of discussion about AI (Artificial Intelligence) these days but remember: AI cannot tell you where the market will end today (it’s just another indicator). AI therefore can only give you an “indication” which is why we want other (and more accurate) indicators that are current and moving with today’s market providing direction, movement, and momentum showing probable highs/lows based on what the market is actually doing.
Most of my intelligence is definitely artificial which is why I have developed several visual chart setups like my AGAIG (AsGoodAsItGets) BEST TRADING CHART SETUP with the following link:
which was designed in order to help make trading easier, more visual, and hopefully more successful. I have several others available on this site as well under AGAIG or AsGoodAsItGets. Always use charts that are visual, easy to follow and understand (the most information necessary but not over complicated) and always remember:
There is no holy grail!
Happy trading!
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