Hey all newish to options and have a question. I was trying to compare multiple options and using the Greeks for risk management, but had a question on theta decay. If theta is an expression of actual dollar value, is there a Greek that shows theta as compared to value? ie 40 dollar contract price with a theta of .05 is actually losing value slower than a 3.5 dollar contract with a theta of .005. Is there a Greek that shows this, and is there a reason why the number would be irrelevant?
Thanks!
Posted by cryosurge1
3 Comments
THETA (also known as theta decay) is the premium you pay (ec theta 0.05)= paying $5 a day to hold the right to sell. It’s relevant cause it can help you gague how long you wanna hold and if the premium (theta) is worth is. So if your negative for the day and the theta is at .5 your paying that 50 automatically from your contract not sure when it’s pull maybe end of day and it’s calculated. DELTA is how much you make on a dollar the underlying stock moves. IV is how often and HOW much it may move
You’re asking if there is a greek that is theta divided by the premium of the contract, so you can know theta as a percentage rate per $1 of premium? No, there is no such greek. And that’s a good thing, because something like that might lead you to exactly the same wrong conclusion that you are laboring under. Any mathematical gymnastics that demonstrate how a $.05/day loss is somehow slower than a $.005/day loss is something to be avoided. Try telling a cop that because the top speed of your Lambo is higher than the average car, going 90 mph in a 65 mph zone is actually below the legal speed limit, as a percentage.
Bigger picture, you’re worrying about the wrong things in the wrong order. I have a standard line that I give to people who have their greek priorities mixed up: delta > vega >>> theta. Unless you are planning to hold OTM contracts for a very long time or very near expiration for any amount of time, theta ought to be the least of your worries.
Don’t use the Greeks for risk management unless you can model the range if likely values of the underlying and integrate the calculated Greeks. The immediate values are only good if the stock gets frozen in place.