Theta question

Discussion in 'Options' started by turkeyneck, Feb 7, 2012.

  1. Does time decay for the next trading day occur gradually during the current trading day or it gets adjusted before the open?
  2. rmorse

    rmorse ET Sponsor

    It's based on supply and demand and is not automatic. If the options decay slower, then IV increased. Faster, IV decreased. It's possible from buying demand to have options increase in price and have negative decay over a short period of time.

  3. It's gradual. Look at some weekly options this thursday night to friday expiry. There is a ton of theta on the open and then it moves down throughout the day.

    For options not expiring < week, it doesn't matter. For options < 1 week your prices in the afternoon will be lower than that morning.
  4. If you want to be a seller and capture theta on the weeklys, is it best to open the trade on Thursday rather than earlier in the week?
  5. it depends. The market is smart and decays the option according to gamma risk. On thursday theta will be bigger and will decay faster but it will be because there's a lot of gamma.
  6. Time decay is gradual throughout the day. The option's price will decline steadily unless IV increases.

    Premium decay is non linear and decays faster as time passes. This effect is greater ATM than ITM/OTM. So in terms of premium per day, you'll get more bang per day with ATM later in the cycle. If ITM/OTM. it might be more constant and make little difference.
  7. TskTsk


    I often find my long theta trades getting a small "profit spike" on the open, so I assume some theta is being discounted overnight.
  8. Trader13