Option Theta Explained (Time Decay Visualized With Examples)

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4 жыл бұрын

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The theta of an option is one of the four primary "option greeks." The other three are delta, gamma, and vega.
An option's theta is a measure of the option's expected price decay with the passage of one day (called time decay), holding the stock price and implied volatility equal.
Intrinsic value of an option is stable, but an option's extrinsic value decays (decreases) steadily with the passage of time.
At expiration, an option will only consist of intrinsic value (if any).
In this video, I explain what an option's theta is and show numerous trade examples to help visualize the decay of option extrinsic value as time passes.
Additionally, I discuss more advanced concepts, such as what position theta tells you about the expected performance of entire option positions.
Be sure to leave a comment down below with any questions you may have!
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Пікірлер: 126

@projectfinance Жыл бұрын

✅ New to options trading? Master the essential options trading concepts with the FREE Options Trading for Beginners PDF and email course: geni.us/options-trading-pdf

@saleem86 4 жыл бұрын

Great video! Would love to see a video on how you combine your directional bets with option greeks to choose the options you trade :) Thanks alot

@chicanotrades 3 жыл бұрын

Hands down the best. this dude really explains everything.

@usserydavid4822 3 жыл бұрын

Hmmmm...turns out I calculate my EV on my weekly short options every day to see how much EV I have. You made me realize I should divide the number of days remaining to see roughly how much I make just off EV every day. Good video, made me think about how I do things. Funny how intuitively I worked the greeks but never bothered to define them.

@lukhmanulhakeem2191 3 жыл бұрын

I found u only today.. now i am going to watch it all. U r a gem💞💞💞

@samuimuscle 3 жыл бұрын

Another awesome VDO from you. I like the speed not too fast not too slow. Keep up great job! I am your fan.

@bradymitten 2 жыл бұрын

Thank you for this. I really enjoy your method of teaching.

@HefTrade 4 жыл бұрын

Your like to dislike ratio... flawless. excellent explanations Chris! thank you!

@Athena19822001 3 жыл бұрын

Thank you so much. I love your videos. So now that we know the definitions of the Greeks, could you do a tutorial on how to apply this knowledge to a real life scenario? I get the definitions, but how do I use this information to make informed decisions?

@bharathraju4638 4 жыл бұрын

Just wanted to say I really appreciate your videos. Highest quality content I've found. You need to write a book or something man, I'd certainly buy it.

@projectfinance 4 жыл бұрын

Thank you so much! I'm glad you're enjoying my channel.

@mrkiddswaqqer101 3 жыл бұрын

thank you for content !! it helps alot for someone new to options

@marcuslum835 3 жыл бұрын

Solid video! I just started options trading and I found a long ITM option (LEAPS) that had positive theta...also had 0 volume but a small number for open interest, 0.94 delta. This confounded me as I couldn't find any other examples of long options having pos. theta. Couldn't google an answer either. Why did this happen? Did i just find a glitch in the matrix lol

@babelscuba 3 жыл бұрын

Great video. Can you also make that decay study with OTM and far OTM options and compare it to ATM options curve? Are there major differences?

@davidnoffsinger5214 4 жыл бұрын

Great video. Really appreciate the clear communication and pace. Nice work.

@projectfinance 4 жыл бұрын

Glad you enjoyed it!

@abrahamb.pomerantz2812 29 күн бұрын

So clear and well done!

@kigas24 4 жыл бұрын

Great video, very well spoken throughout!

@projectfinance 4 жыл бұрын

Thank you!

@donnyh3497 3 жыл бұрын

Fantastic explanation and visual examples of theta bro!

@JoshuaGrasmick1 2 жыл бұрын

The only video that actually explains this thoroughly. Thank you for this video it’s much appreciated

@bjdent 3 жыл бұрын

Hey Chris. Love your educational videos. How do you create the data tables to show historic option prices. Is there a platform where I can see old option prices?

@kohkoh17 4 жыл бұрын

Ur really awesome. Thanks for all the tutorials :)

@projectfinance 4 жыл бұрын

You got it!

@naughtyprincipal4174 2 жыл бұрын

Fantastic explanation of Theta ,I understood it thanks for information

@stevenrogersfineart4224 3 жыл бұрын

Great video. I would say it's more of an overview of ALL options basics as opposed to theta decay. It would be helpful to rename the title for those that just wanted that one particular piece of info

@gregoryphillips4459 3 жыл бұрын

Very good information. Thank you!

@prateekyadav8209 3 жыл бұрын

Hi, thanks for the great video. I really love your channel. I have a question regarding the ATM theta decay plot. In that plot you decides on a strike price and then tracked the price of staddle at that price for the course of option life or each day you consider the ATM straddle? Thanks.

@zobe5172 2 жыл бұрын

Very helpful, thanks a lot brotha!

@SolidworksUnlimited 2 жыл бұрын

Thanks excellent explanation!

@ajmalrasool487 3 жыл бұрын

Please, recommend me a book that best explain options!! Btw your videos are of a great help.

@yashdeepsingh3527 4 жыл бұрын

Thanks man,you really helped me to learn theta and time decay of stock this videos help me alot to understand the theta just in time. I really appreciate your work. Thank you soo much

@projectfinance 4 жыл бұрын

You're welcome and thanks for watching!

@SHEAR-JASHUB 3 жыл бұрын

Great explanation!

@Polettie 3 жыл бұрын

Great video again ... pleas keep it going ...

@amitmehndiratta2568 Жыл бұрын

Lovely Video.. thanks for the learning!

@projectfinance Жыл бұрын

Thanks for watching and commenting!

@iicemusic 2 жыл бұрын

may i ask is it better to trade options compare to trading perpetual contract with stoploss???

@rohitindurkar 4 жыл бұрын

Thanks a lot for sharing knowledge.

@projectfinance 4 жыл бұрын

You're welcome!

@evianway 2 жыл бұрын

Awesome thanks!

@Ye-uh9kz 3 жыл бұрын

Thanks brotha 🙌

@MrPaulHuynh 4 жыл бұрын

amazing content man thanks!

@projectfinance 4 жыл бұрын

Glad you liked it!

@desbailes5542 3 жыл бұрын

Why does Theta change more when the option is ATM? Thanks for great videos.

@PurpsFilms 2 жыл бұрын

I fucking love you for all the option educational videos

@sandrojlu 3 жыл бұрын

Really good video. I’m learning Greeks so much better. I so appreciate it! Question, in your option when is it best to sell? Is it best to sell at a certain percentage? I’m noticing once price has gone significantly under strike price, the profits never seems to rise even when price climbs closer to strike price.

@JK-vb9ps 3 жыл бұрын

some platforms allow u to analyse your option P/L and behaviour. u can use that function to get a sense of your position.

@prabhakarpotu6617 3 жыл бұрын

very good

@gauravhasija83 3 жыл бұрын

Hi I have question, Is Theta decay Linear during the day ? and if not how do we measure the rate of change of Theta with time?

@jerrynix5206 4 жыл бұрын

Great video!

@projectfinance 4 жыл бұрын

Thank you!

@SteveJobs_ 3 жыл бұрын

With ATM in general, as expiration gets closer, Theta's absolute value is increasing. It means Theta is decreasing with the minus mark?

@StevieRomo 4 жыл бұрын

Do you answer questions about options on twitter or social media... I’m currently in an option and I was looking for your opinion? I will not be able to make a change until Monday..

@mathewn3006 3 жыл бұрын

If you’re ATM with say 2 weeks left on your call and the stock price comes up, will you still receive the same exponential increase in profit as if it increased from day one or would it be significantly reduced since you’re closer to expiration, or would it be more since you’re so close to expiration and the specific stock typically isn’t very volatile so the implied volatility should be low(in this case).

@ydsg1 Жыл бұрын

Great video

@projectfinance Жыл бұрын

Thank you!

@YooJT. 2 жыл бұрын

So I had a question about theta. If I purchase an call option at 3pm before market closes does theta still take the full amount of theta?

@okeuwechue9238 9 ай бұрын

Thnx for the vid. You cover in detail how ATM contracts decay. However, for many traders we trade OTM and far OTM contracts and the Theta decay curves for those contracts is actually the *inverse* of the ATM curves, so this video can be very misleading because the OTM contracts actually lose value faster when beyond 30 days than when within 30 days.

@user-rc5uu9tb7v 3 жыл бұрын

Do you get buzzed before you film lmao? Either way I love your videos, always a great teacher!

@Kanendd 2 жыл бұрын

LOLZ wtf.

@plutus205 Жыл бұрын

Does theta decay throughout the day or just day by day?

@alexng159 3 жыл бұрын

Will theta work on weekend?

@dillonle4034 3 жыл бұрын

Does theta calculate by shares? For example if theta is -$1 then $1 x 100 (shares per contract) = $100 I will lose per day?

@zg7920 2 жыл бұрын

If we hold over weekends how much Theta are we paying, one or three ?

@TSMGENT 2 жыл бұрын

So the lower the number in theta decay the better?

@humbertocobena7743 3 жыл бұрын

Is there a way to calculate how much theta hits you by hour? It seems implied volatility increased and so did the price yet I’m still losing value Throughout the day, and it’s expiring in a week.

@mikecoler7052 2 жыл бұрын

When buying a debit spread would you say that you are eliminating time decay from your position since the negative and positive theta is washed out to nearly zero

@personalperspective 3 жыл бұрын

2:27 but what happens if say you have a short option expiring three months from today and the options price is 0.22 and theta is 0.20. That does not seem to make sense. After the passage of one day the contract price should decline by 0.20 cents? But the options price is 0.22 cents with three months left. It obviously will not go to .02 in one day right? .

@fishguru- 2 жыл бұрын

so i have a question....say i am buying a call option. if the stock price never hits the strike price and the option doesn't turn a profit by expiration, what happens to theta ? how is it calculated then?

@MC-gj8fg 3 жыл бұрын

Completely new to options so probably a dumb question, but if a longer time threshold makes an option more valuable then why is the premium per day better on options with a sooner expiry date? For that matter, with this in mind why do most suggest monthlys over weeklys or even dailys? I did a calculation with a hand calculator and a scratch pad this morning on XLF, selecting ~.3 deltas along the way. If I annualized out the premium from puts from a 10 day expiry it was about 23% compared to a little over 13% based on monthly, which seems hardly worth it. If I did the 1 day SPY trade today for 5 days a week throughout the year at a .3 delta I'd annualize 38%. Meanwhile, the closest I can come to a .3 delta for a monthly expiry on SPY today is almost .4% and were I to annualize that I'd only earn 17%. What am I missing here?

@rohitindurkar 4 жыл бұрын

Watching it for second time.

@WorkInProgress212 Жыл бұрын

Do you offer private mentorship?

@yoel.. 3 жыл бұрын

always teaches with a smile and a nice guy to boot !

@nicolasbriceno4899 4 жыл бұрын

Does theta decay overnight, in the morning, or during market hours ? Is theta already priced in on Friday for the weekends ?

@projectfinance 4 жыл бұрын

It is priced in all the time. In theory, option decay happens in real-time and doesn't happen all at once at a particular time. The decay of weekends should get priced in on Friday.

@emanl84 3 жыл бұрын

@@projectfinance I don't understand the concept of "price in all the time". Trading systems/softwares are not continuous, but discrete. At some point between one day another, the option should lose its amount of theta all else being equal. The question is = when?

@tisurmaster 3 жыл бұрын

@@projectfinance priced in on friday? so it decreases faster on Friday to compensate for the weekend?

@zarakivishalkenchan 3 жыл бұрын

@@emanl84 This happens (discretely) as time passes during each day before expiry.

@johannsteinberg6218 2 жыл бұрын

@@projectfinance Friday decay faster then? Many gurus don't know this question Thanks

@touchstone1314 3 жыл бұрын

This is a surgical strike on options😊 Could you please explain relationship of theta with strike price ?

@luckydust7059 3 жыл бұрын

Now, what exactly is the role of THETA token here and TFUEL? is it for payment? we can use other altcoins for payment. can anybody answer?

@letsevolve396 2 жыл бұрын

2:24 in this first example the theta is -0.25., my doubt is, will the value of -0.25 subtracted all at once after trading day closes or is the time decay happening for a stock each and every minute so that after 24 hours cumulative decay will be -0.25 ? cuz this will help me trade expiry days better., plz reply ty :) great video!!

@projectfinance 2 жыл бұрын

It's not a "chunking" kind of thing where it all comes out at once. It's also not 100% specific, meaning the exact theta number won't come out of the option each day, since there are other variables that impact an option's price too (change in stock price, buying/selling of the options based on changing stock vol expectations). The general concept is true though -- an option's extrinsic value will decay over time. Theta is simply an estimator of that ext. value decay on a daily basis, but it doesn't mean we can game it. When trading near expiration, be aware that an option's extrinsic value will decay rapidly. You can look at at-the-money options throughout the day of expiration to see theta in action. For example, if TSLA is at $850, look at the 850 call/put on the morning of expiration. If TSLA is $860 in the afternoon, look at the 860 call/put. The ATM options in the afternoon will be much less expensive than the ATM options in the morning, demonstrating theta decay in a short time frame. The same happens to longer-term options, but much more slowly and harder to see because of it.

@letsevolve396 2 жыл бұрын

@@projectfinance thanks a lot! Now i get it

@jessechavez210 2 жыл бұрын

the further the expiration date out, the slower the theta burn ?

@projectfinance 2 жыл бұрын

Yes

@lucauau Жыл бұрын

How is theta value calculated? All the Greeks seems linked one to the others.. as a move in one impact the value of the others.. a bit confusing for me 😅

@zeekflash6924 22 күн бұрын

I ve seen stock , price move $10 in 30 mins ?tho

@awfulgoodmovies 4 жыл бұрын

So, if my covered call ends in the money...I have to buy back the intrinsic value?.....example: I sell a CC for .75 with a strike of 70...if on expiration day the stock is 75...i have to buy back the contract for 500$ (and whats left of extrinsic..probably pennies)..... say i bought it back for 505$, that means i then lost 430$ ?

@projectfinance 4 жыл бұрын

It means you lost $430 on the option transaction by itself, but you owned shares of stock, so overall you made money, but you didn't make as much money as you would have if you didn't sell the call option. If you trade a covered call and the stock ends above the call's strike price when the call expires, you will make money.

@projectfinance 4 жыл бұрын

I just answered your question in my newest video, check it out: kzfaq.info/get/bejne/ZriIoqynxNfbnnk.html

@daurs8605 4 жыл бұрын

In tastyworks, how is the theta shown to be interpreted? For example at 1:45 you show the table; 57 days to expiration, a $320 call ask price is 12.60, the theta is -11.271. How is the price decay per day(?) to be interpreted? I get the idea of theta, just in tastyworks it seems confusing.

@projectfinance 4 жыл бұрын

The theta of -11.27 can be interpreted as an expected loss of $11.27 per day (all else equal), which means about -$0.11 per day from the option's price of $12.60.

@daurs8605 4 жыл бұрын

@@projectfinance Thank you very much! What confused me is that, the example option shouldn't have any instrinsic value, right? But if you take the decay of -11.271 for 57 days, the out of money option would still be worth $6.42 if nothing else changed according to this theta. You explained and showed that the theta decay rapidly increases in the last few weeks, so does this mean that the theta is actually really inaccurate for a longer period of time?And just represents the theta decay for the couple next days / weeks (or more depending on the remaining time), and when buying options expiring within months / weeks it's worth to just "estimating" the theta acceleration comparing it to your graph instead of relying on the theta at the purchase time?

@samuimuscle 3 жыл бұрын

Hi Chris, today I repeat this VDO from you. My plan is to sell the put options ( out of the money) Do you have any VDO or material explain the Theta profile when to get in/out ? Thank a lot.

@nobletrader9872 2 жыл бұрын

Is the Decay effective hourly or just daily?

@projectfinance 2 жыл бұрын

It's pretty much constant, though very hard to see in real-time. It's the most notable if you watch at-the-money options throughout the day on the day of expiration. You'll see them lose value steadily throughout the day.

@beelee4580 3 жыл бұрын

Silly question: what is directional change, directional bet and directional exposure?

@projectfinance 3 жыл бұрын

It means a change in the stock price. Sorry for the lingo! "Directional exposure" means you have profit/loss exposure if the stock price changes.

@mrnarason 3 жыл бұрын

I'm an idiot, started trading options a few months and just discovered theta decay is a thing

@chillvibesonly720 3 жыл бұрын

when he says one day, does he mean one full trade day or an exact day, like 10:40am, then the next day 10:40am, or does it automatically lose upon open?

@macabrew 3 жыл бұрын

Used tasty works I see, my man..

@MSB1080 3 жыл бұрын

You should multiply theta by 100 if you have 100 shares (standard size on Robinhood).

@sivucit 4 жыл бұрын

Hi, can u pls advise if Theta value is applied on reduce the preimum every sec, or a minute or begining of next day or only at closing?. Bought call at 3 dollar which is 300 $ a contract when underlying shares at 770 for strike price of 800. It has time decay theta as 2.11. So i expect to loose 211 from 300$ premium on next day but however next day I saw that I have not lost 211 dollar but lost just 100 dollar in my premium even though I sell to close when underlying stock price went at 768. In the above example why I have not lost 211 dollar ?. even though I sold it for less than what I bought .. Agreed implied volatility is there but it wont impact this much. Delta should down play as well because this doesnt even have intrinsic value.. Not sure when theta is applied on premium every sec, or a minute or begining of next day or at closing contract

@riftmusic5232 4 жыл бұрын

theta gang

@generivera2999 3 жыл бұрын

Hi Chris. If theta is to my advantage in selling options how can I profit just by selling an option naked

@CS-ww3bs 3 жыл бұрын

12:20 on position theta was what I came for

@aristosmiliopulos8886 3 жыл бұрын

Greek here and very bullish on THETA

@ronaldoEscalanteCruz 2 жыл бұрын

Contradiction contradiction contradiction Theta is a variable in an equation since its rate moves faster closer when it approches strike price then at the start of the option This is if you acknoledge your individual study

@projectfinance 2 жыл бұрын

I don't know what you're saying

@supersaiyanmuslim7569 2 жыл бұрын

@@projectfinance he doesn't either lol

@xgum 2 жыл бұрын

you keep talking about extrinsic value and not theta

@onlydalordknowz2745 3 жыл бұрын

Fckn BBY HAS -1.96 theta that’s fcked up

@sleepybot3905 3 жыл бұрын

jeez. a 15 minute video?? I aint got time to watch this... im over here thinking If I should yolo on some tesla calls?

@jaliyahkane5127 3 жыл бұрын

yolo in TSLA options = bankruptcy

@kingtigercrownestate9102 Жыл бұрын

Your examples of position theta are NOT realistic in assuming that a stock's price is not going to change over time...stock prices CHANGE. Unless you are trading a very quick 0dte options contract the price of the stock price IS GOING TO CHANGE over time!

@projectfinance Жыл бұрын

Yeah you’re right but it’s the easiest way to explain the concept vs. explaining it with other moving parts.

@mr.quacks8136 4 жыл бұрын

Why do you reply to everyone's supportive comments with a Google recommended reply. And then an exclamation mark.

@projectfinance 4 жыл бұрын

What? I reply to comments to say thank you.

@mr.quacks8136 4 жыл бұрын

@@projectfinance I dont think you understand the question

@erickc2055 3 жыл бұрын

@@mr.quacks8136 I don’t either confusing af

@neeleshgothania1356 2 жыл бұрын

I didn't know Jhony sins trying to make money via KZfaq videos!! When did you leave your plumber and doctors job to be KZfaq Guru? :)

@salvadordali6835 10 ай бұрын

Love from India Bro

@projectfinance 10 ай бұрын

Thank you! I just spent a ton of time creating an Options Trading for Beginners PDF (170+ pages now) that includes my best explanations/visuals explaining key options trading concepts and strategies. Check it out: www.dropbox.com/scl/fi/g7d402wnapqexq344ct73/options-trading-for-beginners-aug15-v1.pdf?rlkey=dort61xyaz1rubndbwbqmhd5i&dl=0 If you want updates to the PDF over the coming months/additional learning resources, consider dropping your email on the page here: geni.us/options-trading-pdf