I recently started trading options and while I thought it would be a fairly easy experience and making money would be easy since I had some experience trading stocks and had even dabbled in forex. When I first traded options, I tried to apply my knowledge of other markets. However, I soon learned that there is significant differences between these two.
Initially, things went well. I invested in call options on stocks that I believed would rise in value – and they did!. As I learned more about the process of options trading, however, I realized it was not as simple as buying and selling contracts. One day, I decided to buy a call option of an indice that I believed was going to go up in value. However, the price remained relatively flat for most of that period, and I found myself in a sideways market. Despite this, I believed that the option would still make me money since the stock price hadn’t gone down either. But I was wrong!! That was the day I was introduced to theta decay.
In Options Trading Theta decay refers to the rate at which the value of an option contract decreases as it approaches its expiration date. Theta is sensitive to the time remaining until expiration because as time passes, the chance of the underlying assets moving in favor of the trader decreases.
In other words, as time passes, an option becomes less valuable. This is a critical factor that must be considered when trading options; it can have a significant impact on your profitability.