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how the gears turn
Pricing Options: Time
How the passage of time affects option prices
Bringing Home the Theta
Theta can be positive or negative. Short options carry positive theta which means their P/L benefits from the passage of time. Long options carry negative theta which means their P/L is dragged down as each day goes by. This does not mean long options can't be profitable. It just means that time is working against them.
The Sole Certainty
The only certainty we have in the world of investing is the passage of time. If you ask me, it only makes sense to work with certainty, rather than battle against it. For this reason, I am primarily an option short-seller.
I sell options for their extrinsic value, and buy them back cheaper once time has degraded their value. I aim to keep the difference as profit. Typically, the only time I buy options is to contain my risk to levels I am comfortable with – other than that, I'm a short-seller through and through. I tell you this because we are nearing the end of this section and will move on to strategy next.
Up until this point, I've tried my best to discuss options from both the long and short perspective to give you a more complete understanding. From a strategic standpoint however, I stand firmly on the short side, and will begin to write more exclusively from that perspective. I will continue to do my best to show you everything I've learned, but I want you to be aware of my bias and the reasoning behind it: I prefer time to work for me rather than against me – simple as that.
I sell options for their extrinsic value, and buy them back cheaper once time has degraded their value. I aim to keep the difference as profit. Typically, the only time I buy options is to contain my risk to levels I am comfortable with – other than that, I'm a short-seller through and through. I tell you this because we are nearing the end of this section and will move on to strategy next.
Up until this point, I've tried my best to discuss options from both the long and short perspective to give you a more complete understanding. From a strategic standpoint however, I stand firmly on the short side, and will begin to write more exclusively from that perspective. I will continue to do my best to show you everything I've learned, but I want you to be aware of my bias and the reasoning behind it: I prefer time to work for me rather than against me – simple as that.