What is Theta? – Options Trading

Theta represents the relation of time passing to an options value. Since all options have a expiration date the time is either working for you or against you depending on the current condition of your position.

Any time you sell options for a credit / collect a premium Рtime starts ticking until expiration date and time is working for you. This means if the price stays the same the value of your position will increase because time is running out  for the buyer of what you sold.

If you buy option for a debit – time starts ticking as well but in this case it’s working against you. When you buy an option you can only win if the price of the underlying moves the way you position dictates; thus as the days tick by and with no price movement your position loses value.

The amount of Theta is related to how close the option contracts are to their expiration date. So a new position with 50 days would have less theta effect then one with 20 days.

I try to almost always sell options / collect premium and therefore have time working for me – I don’t use Theta when considering an opening order; only monitoring it when a position gets closer to it’s expiry date. This QQQ ¬†option position is one where Theta has caught my eye.

Note: Theta can go against you even if you sold options – if your position has lost significant value and is nearing the expiration date.