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how the gears turn

Pricing Options: Time

How the passage of time affects option prices
DTE stands for:
Days To Exit
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Days To Earnings
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Days To Expiration
Correct! DTE stands for "Day to Expiration."
Days To Evaluation
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XYZ has a 30% IV level and is trading at $45. Which strike likely has the most extrinsic value?
43 put, 10 DTE
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45 call, 10 DTE
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45 call 20 DTE
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46 put, 60 DTE
Correct! The 46 strike is almost ATM and has 3x the DTE of the next longest dated option. These factors would result in the highest amount of extrinsic value compared to the other choices.
True or false: Short options are advantaged by the passage of time
True
Correct! Short options carry positive theta levels. Since the goal of a short-seller is to close their position for a lower price than they opened it, time decay can help them achieve their goal.
False
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Which of these options would you expect to have the fastest rate of time decay?
ATM put, 45 DTE
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OTM put, 55 DTE
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ATM put, 12 DTE
Correct! ATM options will typically have the greatest rate of decay. This rate of decay typically gets faster as expiration approaches.
ITM put, 12 DTE
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True or false: Options with negative theta levels can't be profitable
True
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False
You are correct! Even though positions with negative theta levels lose extrinsic value over time, they can still become profitable by way of increasing intrinsic value and/or expanding implied volatility.
Your option has a -2.35 theta level. How much intrinsic value is decaying as each day passes?
$0.00
Correct! Intrinsic value does NOT decay due to the passage of time. Only extrinsic value is prone to decay as time passes.
$0.235
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$2.35
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$235
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Long options carry negative theta. What does that mean?
They are bearish positions
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They profit off of decreasing volatility
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Their delta shrinks over time
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They lose value over time
Correct! Negative theta means the option is negatively impacted by the passage of time. All extrinsic value in the option will decay to 0 by expiration.
XYZ is trading for $45. How might you achieve the greatest positive theta decay?
Buy the 40 call
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Sell the 50 put
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Buy the 45 put
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Sell the 45 put
Correct! Only short options will get you positive theta levels, and the ATM options will typically have the highest rate of decay.
A sharp increase in implied volatility would likely do what to theta levels
Theta decay rates would stay the same
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Theta decay rates would likely increase
Correct! A sharp increase in IV would imply greater risk and would likely cause theta rates to increase in magnitude.
Theta decay rates would likely decrease
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There's no telling
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As traders, how can we achieve positive theta values?
By buying options
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By selling options
Correct! The only way to achieve positive theta levels is to short options with extrinsic value.
By buying shares
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By selling shares
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