In today's video we will work through a case study on an ETF to understand how theta varies based on strike price and expiration date. You will find that the differences in theta from one strike price to the next is fairly nominal. However, theta will typically increase the closer you get to expiration.
An awareness of theta or time value really applies when deciding whether to short an option where theta can help you and when to go long an option where theta may hurt your returns. In the short term, shorting an option and using theta to increase returns could be ideal. However when evaluating a long term option position or anticipating a very large move in the underlying, price movement is more likely to offset the disadvantages of the decline in time value or theta in a long option position.
- To see the previous series about option delta click here.
