Been trading options for a few months now and keep hearing about theta decay eating into profits.
I know it relates to time, but I want to learn how to calculate it myself. My app shows numbers but I need to understand the math.
I usually just buy calls and puts without focusing on the Greeks. I think that might be a mistake.
Don’t stress about the calculations; Black-Scholes does the heavy lifting. Pay attention to theta as time passes, especially in the last month. Options at-the-money decay the quickest. In-the-money options experience less theta risk. Use the theta provided by your broker for timing your trades instead of doing the math on your own.
Black-Scholes uses these inputs to calculate theta:
• Stock price
• Strike price
• Time to expiration
• Risk-free rate
• Volatility
The math is complicated, but your platform does it automatically. Just focus on the theta values it provides.
Theta represents the daily loss of value for an option as it nears expiration. Most brokers use Black-Scholes for this calculation, which can be complicated.
Options nearer to expiration decline in value quickly, particularly if they are out-of-the-money. By choosing options with longer expiry dates, the rate of decay reduces.
Familiarity with the Greeks can improve trading skills. It’s not necessary to calculate the numbers yourself; focus on comprehending their implications.
Theta shows daily value loss for options, usually between -0.01 and -0.10.
Learned about theta the expensive way - blew $800 on SPY calls last year. Held them too long and watched time decay eat my profits until they expired worthless.
That final stretch is brutal. Theta ramps up hard in those last few weeks. I’ve had winning trades turn into losers just because I got greedy and didn’t exit.
Now I’m out at least 2 weeks before expiration. Not getting burned by that decay again.