Options trading part 4: Theta/time decay risk

Theta, commonly known as the “time decay” of an option contract, is our third risk consideration while trading options & delta-hedging

Theta (Θ) is an important risk to consider when trading options is time decay which is the loss in value of an option contract over time.

Understanding “time decay” or “theta” is essential to understanding where an option contract derives its value.

“Theta Θ” is also known as the time decay of an option contract.

“Θ” is the symbol used to represent “theta.”

An option contract derives its value from the “intrinsic value” and the “time value.”

The “intrinsic value” is the amount by which an option contract is “in the money” (ITM) or not.

Meaning the difference between the “strike price” and the “current price” of the underlying (i.e., spot).

Disclaimer:

You have learned in school, on…