Theta

Options are more expensive the longer the time to maturity. Hence all options will become less valuable the longer they are held. This decay of time value (theta) will thus work in favour of short positions in options and against long positions (whether calls or puts).

Bought options have negative thetas, sold options have positive thetas. Generally a portfolio with a positive theta will gain in value as time passes and nothing else changes, whereas a portfolio with a negative theta will decay over time if nothing changes.

In general, as the expiry date comes closer the value of the option falls, all other things being equal. This is intuitively correct because there is less time in which a price movement can occur. This rate of decay tends to accelerate as the option approaches its maturity date and decelerates as the option moves out of-the-money.

Options close to the money will have more influence on the position theta than options far from the money. This is due to an option having its maximum time value (ie. price less intrinsic value) when it is at the money. Most time decay occurs near to expiry. It is at this time that a positive theta will be most profitable, assuming that the strategy can he kept delta hedged.

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