Futures contracts can be an effective and efficient risk management or trading tool.
Theta options performance is basically two-dimensional, either you are up money or down depending on the entry price point and whether the market is up or down versus your position. But with options on futures there are more dimensions, or forces, acting on the price or premium of the option.
There are metrics to measure each of these different forces impacts on the premium of an option. Now we will investigate the effects of time on an option.
Theta is usually expressed as a negative number. Be careful to always make sure what time is referenced in the model you are using. For example, if the value of an option is 7.
Option Approval Levels Explained
Theta is highest for at-the-money ATM options and lower the further out-the-money or in-the-money the option is. The absolute value of theta of an option that is at- or near-the-money rises 30 second options strategy the option approaches expiration.
Theta for an option that is deep in- or out- the-money falls as the option approaches expiration.
In theta options prior example, theta was a constant value of. In reality, the theta loss increases as the option approaches expiration.
Example In March, a September option will have a daily time decay of. By August, the daily decay will increase to. Time decay is not linear, and moreover, for ATM strikes decay continually accelerates into option expiration.
Interested in options trading strategies that target the passage of time? This article is for you.