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What Is Theta In Options? - 3 Amazing Facts About Time Decay in Options - YouTube
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So what is this "Theta"
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in options?
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Here are three amazing things
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about time decay in options.
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You see when you're buying options,
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time decay can suck the
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life out of you.
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But when you are selling options,
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you should forget everything you
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learned about time decay because now
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suddenly Theta
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is your best friend.
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And in this video, I'll show you
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three amazing facts about time
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decay and options.
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So let's get started.
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Now, let's also quickly review.
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In my last video, I talked about
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option premium and we talked about
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the real value and
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time value, you remember?
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This is what we are talking about.
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If you need a refresher for this,
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then watch the video that I did on
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option premium, I'll link to it
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in the description.
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But summary, in a nutshell,
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if an option is out of the money,
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then there's no real value in this
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option. And the premium you see on
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your trading platform is
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only time value.
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So let's take a look at the very
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specific example.
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Let's talk about a trade that I
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currently have in my account.
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This is SPCE.
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Right now the stock is trading,
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as you can see, at
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$17.99. Let's talk about a put
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option because this is exactly
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what I traded.
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Now, a put option means
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that you're allowed to sell the
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stock at a certain strike price.
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And I traded the 13 put,
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which means that somebody who owns
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that put option is allowed to sell
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it at $13.
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So this is what you see here this
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line. Right now, the price
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of SPCE is at
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$17.99 - $18.
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So why would anybody
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exercise the option and sell
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the stock for $13
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if right now you can sell it for
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$5 more at $18?
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It doesn't make sense, right?
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So this is why there's
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no real value in this option
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unless the price drops
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below $13.
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So this means that the price of the
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option that is trading for right now
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is only the time
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value. So if you need a refresher
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or a more detailed explanation
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on this, watch my video about
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options premium.
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You'll find the link in the
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description. So let's
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take a look at the option price
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right now. So the 13
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put option with an expiration of
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May 8 is trading,
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as you can see at $0.32
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by $0.37, so that's the
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bid ask.
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I did a video about this of what
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exactly this means.
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Let's use the midpoint here $0.35.
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so this here is only
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the time value.
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And you see options are traded in
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100 packs. So this means
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that there's $35 in
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time value in this option.
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So now let's talk about what
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is Theta in options.
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You see the Theta shows you
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how much the option loses in
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time value per day.
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As you can see, the theta it
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is showing right here for the
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13 put is
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0.046. And since options are
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trading in 100 packs, this
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translates into a so-called
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time decay of $4.60
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per day. Now here are
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the three amazing facts about
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time decay in options.
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Fact number one, it is the only
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thing that's guaranteed every
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day the time value of an option
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is getting smaller.
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And this also called time decay.
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As you know, usually there's nothing
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guaranteed when it comes to trading,
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but time decay is.
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Which is great when we're selling
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options, and that's what I like to
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do right now, since the markets
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are still crazy.
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Fact number two, the sooner
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the option expires, the higher
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the time decay.
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Let me show you exactly what I mean.
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So here the Theta of the 13
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put right here that we see
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at the end, that expires on May
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3rd, which 11 days to expiration
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is $0.046.
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Now, take a look at this.
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I want to move out one more
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expiration to May 15th.
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Now, if you look at the Theta
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of this put option, it is
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only $0.041.
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So this means that you are
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basically, or that this option loses
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$4.10 per day.
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Now, as we go out even more,
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and I'm doing an extreme right now
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I'm going to June 19th
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and we're looking at the 13 put.
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This is where you see if it expires
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in 53 days it is only
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$0.025. Now, this
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is super important.
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If you are an options buyer
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then time decay is your enemy.
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So as a buyer, you
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want to choose more days to
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expiration so the time
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decay doesn't hit you.
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And if you're an option seller,
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then time decay is your friend.
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So as a seller, you want to choose
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as few days to expiration
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as possible.
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Now, before we talk about the third
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fact, which is my personal favorite.
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Let me quickly ask you, is this
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making sense thus far?
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Because if it does click on like
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right now so that I know which
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videos you like best and then I'll
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make more of these videos.
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OK. Fantastic.
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Let's move on to fact number three.
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Since time decay decreases
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every day, you can
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make money even if the stock does
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not do what you want.
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Let's actually talk about
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my trade.
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I was selling the 13 put, this
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means I want the stock price to stay
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above $13.
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Ideally, I want the stock
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price to go up.
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Now, I sold this put option
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on April 20th when the
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stock price was at $19.
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You see, since I sold it, over the
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past week it moved down,
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it is trading at $18.
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This means that SPCE
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dropped almost 5%.
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But here's what happened.
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Let me show you my trading account.
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I sold this option
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right here for $0.58.
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And right now, one week later,
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it's trading at $0.34.
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So this means that I'm making
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$24 per option.
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And since I traded 25
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options, that's a profit
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of
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$581. So as you can see, even
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though the stock did
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not do what it was supposed
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to do, I still made
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money. Here we go,
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SPCE was supposed to go up, but it
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went down, as you can see
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5% and I still
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made $550,
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$580 here.
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That's why I love selling
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options during times
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of high volatility.
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All right, now you understand what
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Theta in options is and how a time
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decay of options work.
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And if you enjoyed this video, then
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click on any of these other videos
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that appear on your screen right now
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and I'll see you there.
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Talk to you very soon.
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