Option Theta
Option Theta or Theta measures the amount of time decay of a option. Remember options are wasting assets.That means at some time in the future, they will have no value.
So, every option that is purchased is losing value. (assuming option price and volatility remain unchanged) This is why you will sometimes hear traders say: "
options are made to be sold".
I Would Have To Agree. It Is Really Difficult To Make Money Consistently By Buying Options
The Theta of every option by itself will be a negative number.
For instance, if an option has a theta of -.50, that means that option will lose .50 in value per day. Of course, it's possible to combine buying and selling options to create a position that is net positive option theta. This mean that the passing of time benefits the position.
In fact, some people refer to as a “time spread” because its main source of profit is from time decay.
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A quick look at this graph may leave you with the conclusion that it is best to sell options that expire in 30 days or less. It is true that the time decay for at-the-money options is greatest the closer you are to expiration.However, as always with options trading, when you gain something, you must give something up. In this case, you are taking on more risk.
It's not "wrong" to sell an 30 day options. Just make sure you understand the risks. And the reward justifies these risks.
Option Vega
Option Vega refers to how an option’s price will change with a change in the volatility of your underlying.
In other words, if your stock price really starts bouncing up and down, then the volatility has increased.This means the Vega increases.
It is important to remember that all options gain value with rising volatility.
This includes calls and puts.
For example, lets say an option has a Vega of .30. This means if the volatility increases by
one percentage point, this option will gain .30 in value.
Conversely, if the options volatility drops by one percentage point then this option would lose .30.
A drop in volatility is represented by a drop in Option Vega.
Here is another way of looking at it:
If the same option of "jindalsteel" in the example above has a value of 10.63 at a volatility of 32.8% then at a volatility of 33.8%%, it will have a value of 10.80
Make sense? Clear as mud right?
So what would be the value of this option if the volatility dropped from 32.8%% to 31.8%?
(10.3 - .17 = 10.13)
Another thing to keep in mind: All option's volatility decrease as expiration approaches. It is for this reason that longer term options are far more sensitive to changes in volatility than short term options. Remember, volatility only effects the time value of an option. If you're new to the concept on time value, check out previous pages explaining
intrinsic and time value.
Again, the reason for this difference is due to the element of time. The longer an option has till expiration, the more time value that is built into that option.
In addition, a stock has a much greater chance of making a big move in 70 days verses 30 days.