Theta Options Trading. Is It Right for You? 

Understanding Theta Options Trading

Theta Options Trading

Theta is the rate at which the extrinsic value of an option diminishes daily. This indicator is the most difficult to interpret since it presupposes that indicated volatility and price movement would remain constant. As a result, it is preferable to consider theta degradation in the context of the larger scale of things. Read on to know more about Theta Options Trading.

Positive Theta

When you have a positive theta value, you are on the right side of the scale. You could sell options to get a positive theta. All options that have time remaining before expiration have assigned extrinsic value. As an options trader, this degradation is beneficial to your business. 

Consider the following scenario: you offer a put for $1.00. To close the position, you must purchase that same option again. It would help if you bought back the option at a lower price than its original buying cost to make a profit. Therefore, theta is a positive value for option sellers in the chart. The daily depreciation of an option’s price will assist you in realizing your profit more quickly.

Negative Theta

It means that you’ve landed on the wrong side of the coin when you have negative theta. You would have to purchase options to achieve a negative theta. Because you are trading against the clock, experiencing negative theta is not a pleasant sensation. Since the intrinsic value of your options would diminish with time, you either be directionally correct rapidly to have a profit, or you must have implied volatility grow more than theta to see a profit. 

For this reason, you always hedge the long options with a short option while you are trading extended options. Unlike long bare options, calendar spreads, long vertical spreads, and diagonal spreads are preferable since you can eliminate most, if not all, of the decay by using these strategies.

Implied Volatility and Price Movement 

Theta Options Trading

It’s vital to note that it presupposes that implied volatility and price movement are held constant at all times to understand theta. Markets move on a second-to-second basis, making it impossible to assume they remain frozen. We may not look at our alternatives and anticipate the value to reduce by theta daily, no matter how much we want it to subside. 

While theta may be out from the option, price movement and implied volatility will impact the option’s value. For as long as we’re on the right side of the equation (positive theta), we can be confident that the extrinsic value of our option will continue to decline as we near expiration, and it’s one of the prerequisites to being a successful option seller.

Calculating Theta Options Trading

When expressed as a dollar or premium amount, theta might be determined daily or every week, depending on the situation. It’s vital to remember that this isn’t a fast and challenging way to assess the worth of an option; everything is just theoretical. Due to the assumption that price movements and implied volatility are continuing, the degree of negative returns for an option is not always the same from one day to another.

Comparison of Theta Options Trading and Other Options Greek

Discover Theta Options Trading. All Explained

Theta Options Trading. Is It Right for You? 

When considering option positions, keep in mind that there are several factors to consider. Find an overview of the other options Greeks and what they measure as provided below:


The delta of an option relates to how susceptible the option’s price is to a one-dollar change in the underlying stock’s price. Depending on whether the option is a put or a call, the delta might be positive or negative.


Gamma is a tad more complicated. When comparing the option’s delta to a $1 change in the underlying security, it gauges an option’s sensitivity to that change. Gamma is used to follow an option’s price movement.


When an option’s contract price moves by one percent in response to a one percent change in the underlying stock’s implied volatility, it is the Vega. Essentially, it is a method of determining how much the price of an option could rise or fall.

The four option Greeks, including Theta options, work collectively to assist you in developing a strategy for buying and selling options to maximize your profits.

Single-Leg Position Theta 

Theta Options Trading

Theta for single-leg postures is a pretty straightforward position to understand. Whenever you are holding a single-leg position, theta shows the amount by which the option’s price declines daily. A theta value of -0.02 indicates that the option will lose $0.02 ($2 in theoretical terms) every day if you exercise the option. 

Theta still shows that the option’s price will decline each day if you short a single-leg position. Still, the time decay acts to your advantage if you short a single-leg position.

Multi-Leg Position Theta

Positions with several legs, like iron butterflies and iron condors, profit from theta depreciation on either side of the trade since it doubles the money made. There are significant disparities in the prognosis and risk/reward characteristics of iron condors, iron butterflies, and credit spreads, among other things. A temporal decay happens when a wing’s likelihood of ever getting in-the-money declines, which is the case for an iron condor because it has out-of-the-money branches. 

Depending on whether you’re trading daily, weekly, or monthly iron condors, this will occur at various periods during the trading session. On the other hand, Iron butterflies often center on money, which means that their principal temporal value depreciation occurs closer to the expiration date.

Credit and Debit Stretch Theta

Consider the use of a multi-leg debit spread. When you are optimistic on SPY, a call debit spread consisting of a long call acquired at the money and a short call sold $10 out-of-the-money has a theta of -0.06 since the theta of the at-the-money deal is partially mitigated by the theta of the short contract. Keep in mind that when you are long an options plan, theta works against you, and if you are short an options contract, theta works to your advantage. A long call spread is negatively hit by theta, but the severity of the consequences lessens due to the employment of a short option in the stretch.

Consider the case of a put credit spread in which you are the net options seller. When you are optimistic about the underlying security and want to establish a risk-defined strategy, you can sell a 0.30 delta put 30 days before expiration and buy a put costing $10 lower and out-of-the-money to achieve this. The theta of the credit spread is 0.01 points higher than that of the long put because the theta of the 0.30 delta short put is more significant than that of the long put. It is important to note that the theta becomes increasingly flat as you failed with the credit spread.

Is Theta Trading Options Right For You?

The risks associated with options trading are similar to those associated with any other investment technique, and they are not suitable for everyone. Thus, it is critical to understand how alternatives work and the potential benefits and drawbacks associated with them. Understanding Theta and the other Greek letters can assist you in accomplishing this and fine-tuning your strategy.

If you’re okay with taking control of your portfolio, a self-directed account might be a valuable tool for exploring the possibilities of different investment strategies. Several products, including options, are available through Ally Invest for those who choose to trade independently.

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