Options Glossary

Glossary: Theta

Last Updated: July 12, 2015



What Does Theta Mean in Options Trading?

Theta estimates the decay in the options contracts value per day assuming no move in the underlying.  Theta is extremely important for premium sellers as it indicates the maximum erosion of time value each day.
Driftless Theta is defined in a note at the bottom of this article.

How to Use In the Brutus Options Ranker

Theta is an important criterion of any options trading strategy that defines the decay rate of the setup's spread.  Theta can be added to any of your Brutus Options Ranker strategies but your objective will vary, depending if your assigned setup is net long or net short options:
Net long in your position:  Theta will be the price you pay each day to hold the position.  If you are net short in your position, then this is the price you pay each day to hold the position.  As such, you will want to minimize theta in your strategy.
Net short in your position: Theta, in this case, will be the amount the option decays each day and therefore how much the position can profit.  In this case, you want to either maximize or target theta to a high value.
Note that as your theta increases so will your gamma.  As a seller of options you will want to minimize gamma and, as a buyer, you will want to maximize gamma.  Therefore, it is important to also include gamma in your strategy.

Note on Driftless Theta vs. 'Normal' Theta

For beginner traders, you can select either Theta or Driftless Theta to add to your Brutus Options Ranker Strategy Tree. For more advanced traders, the difference between Driftless Theta and Theta can only be understood by looking under the hood of the Black-Scholes model.  The Black-Scholes model includes a risk-free interest rate in its calculation.  This risk-free interest rate effectively defines the drift in the underlying and it's future value.  Driftless Theta is the Theta derived from the Black-Scholes model with risk-free interest rate ignored.

Videos Explaining Theta 

We found these videos that explain the topic well.  
All 3rd party videos are shared via public platforms and the trademark's are for their respective companies; OptionAutomator makes no claims on the accuracy of this information.

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