Yes, theta changes daily.
Understanding Theta
Theta represents the rate of decay of an option's premium over time. It's measured in dollars per day and indicates how much value an option loses each day due to the passage of time.
Factors Affecting Theta
- Time to Expiration: The closer an option is to its expiration date, the faster its theta decays.
- Volatility: Higher volatility generally leads to a higher theta.
- Underlying Asset Price: Theta can be influenced by the price of the underlying asset, particularly when the option is deep in or out of the money.
Daily Changes in Theta
Theta changes daily because:
- Time is constantly passing: As each day goes by, the option gets closer to expiration, causing theta to increase.
- Market conditions fluctuate: Volatility and the price of the underlying asset can change daily, impacting theta.
Practical Implications
- Option sellers benefit from theta decay: Option sellers profit from the decline in option premium over time.
- Option buyers face theta decay: Option buyers lose money as theta decays, especially if they hold the option for a long time.
Example:
If an option has a theta of -$0.20, it loses $0.20 in value every day due to time decay.
Remember: Theta is just one of several factors that influence option pricing. Other factors, such as delta, gamma, and vega, also play significant roles.
