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I read a lot about theta and I get confused. If I plan to buy a long call option to bet the stock price will go up. Is larger theta value better or smaller theta value better in terms of profit gain? For example, a stock is at 100 dollars right now. I decide to buy a call option with an expiration date 6 months later. The option with strike price 110 dollars has theta 0.45 and the option with strike price 120 dollars has delta 0.40. So, which option is better? Moreover, if we also consider in the money options (options with strike price lower than 100 dollars), does the answer change? Thanks

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The primary requirements for success when buying options are getting the timing and direction right. Next in line is selecting the strike price that will provide the the highest percent gain given your expectation (hope?) for when and how much the underlying moves. IMO, basing your strike price selection on theta is effectively a waste of time because given that the two options in question are for the same long dated expiration, the net difference in theta decay between the two will be minimal.

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  • I see. But for the same strike price, if I want to choose a different expiration date, for example, 6 months vs 12 months, will the theta value be important? Oct 2 '20 at 2:20
  • Also, I saw your post about ITM and OTM. If I choose ITM strike price, $90, will this make any difference? Oct 2 '20 at 2:21
  • Moreover, if I want to use theta to decide which stock to pick, will it make any difference? For example, the option of stock A and the option of stock B have the same expiration date. The strike prices are all 10% higher than their current prices. But the option of stock A has theta 0.4 and the option of stock B has a theta 0.3. Which stock option should I pick? Oct 2 '20 at 2:25
  • In a previous post (or comment), I provided you with some option calculators. You should input some numbers into them and compare the results. That will be a better and more comprehensive learning moment that me describing various scenarios in limited length comments. The data output will be more informative than any word description. Oct 2 '20 at 3:32
  • But just so you don't go away empty handed, a loose rule of thumb is that the premium for ATM options is related to the square root of the time remaining, with all other pricing parameters being equal. So as an example, if a 9 month option is trading for $3 (sq root of 9), it will be worth $2 at the 4 month mark (sq rt of 4) and $1 at the one month mark (sq rt of 1). So yes, time decay is a consideration, However, the offset is that a lower theta means a higher premium cost and a less responsive delta. You have to find the sweet spot that you're comfortable with. Oct 2 '20 at 3:33

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