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Why Theta is important for Option Traders?

Why Theta is important for Option Traders?

Options Theta is one of the important options Greeks and it can be used to help you predict how the prices of options change in relation to various factors. The theta value is the Greek which indicates how the price of an option changes as the expiration date gets closer and closer.

How Theta is helpful for option traders?

Neutral Strategies

Theta is especially important for traders who use trading strategies for a neutral market, because those strategies are typically used to profit from the effects of time decay. When employing these strategies, it is critical that the overall theta value of your position be at the appropriate level in order to benefit from the diminishing extrinsic value. If our trade/position is negatively affected by time decay, we will have to rely on directional moves in the underlying security to make a profit, which defeats the purpose of using those strategies in the first place.

Huge Directional Strategies

Traders who use strategies to profit from significant directional moves in underlying securities and plan to hold positions until expiration do not need to be concerned about theta mostly. We know the loss of extrinsic value in these trades is essentially a direct expense of the trade, and should be offset by profits from the relevant directional moves.

Delta is far more important in these cases, though there’s no harm in checking the theta values involved and getting an idea of what the effects of time decay are likely to be.

Small Directional Strategies

Theta is important for traders when they enter positions where they expect small directional movements in underlying securities over a short period of time. To profit from these positions, the gain in intrinsic value must be greater than the loss in extrinsic value.