My question refers to option theta to assess if this is relative high or not. The NVDA May21 610 call (ATM) is priced at $22.90 and has a theta of $0.40. This is a time decay of 1.74 % per day. The NVDA May21 635 call (OTM) is priced at $12.95 and has a theta of $0.37. This is a time decay of 2.85 % per day. Which one is the better option or is the time decay for NVDA calls with this expiration date to high in general? I don´t know how to assess this. Thanks
theta is meaningless without understanding the other risks it is financing : gamma and other second order risks. for atm this is pretty simple: it’s really just gamma. For otm there are other risks that theta pays for. the ratio of these risks vs theta is captured by the implied vol. No one looks at theta as the percent of options premium as the options premium is just a sum of all the risks (like an integral over time of the average of all the risk scenarios the option could go through).
Ok. Understood, but which call would you prefer if you want to buy, or is theta too high for these NVDA calls?
I don’t have a view on NVDA so I would buy neither. You should buy the one that reflects your view the best
In most cases,i.e. bill marlkets,the larger the delta,the higher the returns.. I backtested NVDA 30 day rolling options over 10 years,running detas of .30,vs .50 vs .80... Sharpe on the 30 delta was awful,Sharpes on the 50 and 80 were both apx 1...Interestingly,the Sortino on the 80 delta was by far the worst,i.e more sensitivity to "negative" volatility.. Did not test with stops,nor did I trade equal deltas..1 call purchased regardless of delta..