Turbo charging theta

[Baozi]

I have found that for OTM options, the decay occurs in a more linear manner with a bit of acceleration towards the end (final 2-3 weeks). This acceleration is much more pronounced the closer you are to ATM, but I would say max acceleration occurs in the last few days (or hours) not in the 40-20 DTE period.

I didn't mean to say that 40-20 dte is peak acceleration, but simply that it is the time frame when the decay becomes more noticeable. Sure the decay in the last few days is greater, but it's a way more dangerous spot to be short..

 

[Doobs789]

The market is well aware that time passes. In fact, the entire universe is based on it.

 

[newwurldmn]

The market is well aware that time passes. In fact, the entire universe is based on it.

That depends on how fast you are traveling vs everything else.

 

[Doobs789]

That depends on how fast you are traveling vs everything else.

Fair. If traveling at the speed of light, disregard my post.

 

[destriero]

I think new is referring to time dilation.

 

[drmark27]

you cant earn theta unless you are an insurance company because its very very dangerous. you need to buy lots of insurance and pay premiums.

Quantify "very very dangerous." Quantify "lots of insurance."

 

[motterpaul]

I believe the acceleration you see in the last few DTE is Gamma - the rate of change in Delta. Delta is pretty steady 45-21 DTE (and Gamma is 1), but as you get closer to expiration Gamma starts to pick up and can be five times higher on the day of expiration ( Gamma: 5) because the options prices are changing so quickly. Gamma is very risky and unpredictable because a change in the direction in the underlying can mean a big change in the value of your option.

So, while trading on the last day can be very profitable, it can also be the opposite, wiping out weeks of gain. If you see a market crashing, then selling calls (buying outs) can be a good thing, (or the opposite) - but on an average day it is too risky. Also - be sure you can get out before expiration or risk getting assigned.

 

[TradingDemystified]

I believe the acceleration you see in the last few DTE is Gamma - the rate of change in Delta. Delta is pretty steady 45-21 DTE (and Gamma is 1), but as you get closer to expiration Gamma starts to pick up and can be five times higher on the day of expiration ( Gamma: 5) because the options prices are changing so quickly. G

This acceleration occurs in the way you describe very close to ATM. OTM (delta 20 and further for example) has a smoother decay (and gamma/theta expansion) as expiration approaches.

 

[motterpaul]

This acceleration occurs in the way you describe very close to ATM. OTM (delta 20 and further for example) has a smoother decay (and gamma/theta expansion) as expiration approaches.

Good point and true

 

[eaglefeather]

I've noticed selling theta further out is easier to control in regards to change of the underlying. While it is tempting to sell theta near term to capture the collapse, it is harder to hedge large moves against you due to the rise in delta. That's really caused a shift in my thinking of late.