So what is this "Theta"
in options?
Here are three amazing things
about time decay in options.
You see when you're buying options,
time decay can suck the
life out of you.
But when you are selling options,
you should forget everything you
learned about time decay because now
suddenly Theta
is your best friend.
And in this video, I'll show you
three amazing facts about time
decay and options.
So let's get started.
Now, let's also quickly review.
In my last video, I talked about
option premium and we talked about
the real value and
time value, you remember?
This is what we are talking about.
If you need a refresher for this,
then watch the video that I did on
option premium, I'll link to it
in the description.
But summary, in a nutshell,
if an option is out of the money,
then there's no real value in this
option. And the premium you see on
your trading platform is
only time value.
So let's take a look at the very
specific example.
Let's talk about a trade that I
currently have in my account.
This is SPCE.
Right now the stock is trading,
as you can see, at
$17.99. Let's talk about a put
option because this is exactly
what I traded.
Now, a put option means
that you're allowed to sell the
stock at a certain strike price.
And I traded the 13 put,
which means that somebody who owns
that put option is allowed to sell
it at $13.
So this is what you see here this
line. Right now, the price
of SPCE is at
$17.99 - $18.
So why would anybody
exercise the option and sell
the stock for $13
if right now you can sell it for
$5 more at $18?
It doesn't make sense, right?
So this is why there's
no real value in this option
unless the price drops
below $13.
So this means that the price of the
option that is trading for right now
is only the time
value. So if you need a refresher
or a more detailed explanation
on this, watch my video about
options premium.
You'll find the link in the
description. So let's
take a look at the option price
right now. So the 13
put option with an expiration of
May 8 is trading,
as you can see at $0.32
by $0.37, so that's the
bid ask.
I did a video about this of what
exactly this means.
Let's use the midpoint here $0.35.
so this here is only
the time value.
And you see options are traded in
100 packs. So this means
that there's $35 in
time value in this option.
So now let's talk about what
is Theta in options.
You see the Theta shows you
how much the option loses in
time value per day.
As you can see, the theta it
is showing right here for the
13 put is
0.046. And since options are
trading in 100 packs, this
translates into a so-called
time decay of $4.60
per day. Now here are
the three amazing facts about
time decay in options.
Fact number one, it is the only
thing that's guaranteed every
day the time value of an option
is getting smaller.
And this also called time decay.
As you know, usually there's nothing
guaranteed when it comes to trading,
but time decay is.
Which is great when we're selling
options, and that's what I like to
do right now, since the markets
are still crazy.
Fact number two, the sooner
the option expires, the higher
the time decay.
Let me show you exactly what I mean.
So here the Theta of the 13
put right here that we see
at the end, that expires on May
3rd, which 11 days to expiration
is $0.046.
Now, take a look at this.
I want to move out one more
expiration to May 15th.
Now, if you look at the Theta
of this put option, it is
only $0.041.
So this means that you are
basically, or that this option loses
$4.10 per day.
Now, as we go out even more,
and I'm doing an extreme right now
I'm going to June 19th
and we're looking at the 13 put.
This is where you see if it expires
in 53 days it is only
$0.025. Now, this
is super important.
If you are an options buyer
then time decay is your enemy.
So as a buyer, you
want to choose more days to
expiration so the time
decay doesn't hit you.
And if you're an option seller,
then time decay is your friend.
So as a seller, you want to choose
as few days to expiration
as possible.
Now, before we talk about the third
fact, which is my personal favorite.
Let me quickly ask you, is this
making sense thus far?
Because if it does click on like
right now so that I know which
videos you like best and then I'll
make more of these videos.
OK. Fantastic.
Let's move on to fact number three.
Since time decay decreases
every day, you can
make money even if the stock does
not do what you want.
Let's actually talk about
my trade.
I was selling the 13 put, this
means I want the stock price to stay
above $13.
Ideally, I want the stock
price to go up.
Now, I sold this put option
on April 20th when the
stock price was at $19.
You see, since I sold it, over the
past week it moved down,
it is trading at $18.
This means that SPCE
dropped almost 5%.
But here's what happened.
Let me show you my trading account.
I sold this option
right here for $0.58.
And right now, one week later,
it's trading at $0.34.
So this means that I'm making
$24 per option.
And since I traded 25
options, that's a profit
of
$581. So as you can see, even
though the stock did
not do what it was supposed
to do, I still made
money. Here we go,
SPCE was supposed to go up, but it
went down, as you can see
5% and I still
made $550,
$580 here.
That's why I love selling
options during times
of high volatility.
All right, now you understand what
Theta in options is and how a time
decay of options work.
And if you enjoyed this video, then
click on any of these other videos
that appear on your screen right now
and I'll see you there.
Talk to you very soon.