Thursday, January 7, 2010

Option Greeks Part 3 - Theta Practical Example

Theta recap: The amount of change of an option’s price with respect to a 1-day change in time.

Selling option premium, and reaping the benefits of time decay is the most consistent way to profit in the options market place.

Disregarding the unlimited risk involved in dreams short strangle strategy, lets cover theta using GS example:

GS January 2010 Hypothetical Example:

Short Strangle
Date: 21/12/2009
Short 160 PUT
Short 175 CALL

Short 160 PUT THETA: +9.03
Short 175 CALL THETA: +7.30

NET POSITION THETA: 16.33

For a 5 contract trade the Net Position Theta would be $81.65.

So for every day passing of the trade we expect the position to gain $81.65 due to time decay.





To be continued...

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