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In the past, I've pointed out that there are several fundamental principles that must be mastered before profits can be attained when trading options . Novice traders typically skip the discussion about The Greeks and skim over volatility only to watch their precious trading capital disappear. This article will discuss the Greeks as they relate to options trading in a way that hopefully everyone reading can understand. While there are more than 10 Greek symbols that directly relate to option pricing, an option trader must be able to clearly articulate and understand four of the ancient Greek symbols and one English invention. (Vega is not a true Greek symbol -look it up!) The five core Greek symbols that are critical to understand are as follows, in no particular order: Delta, Theta, Vega, Gamma, and Rho. Most veteran option traders have a sound understanding of Delta, Theta, Vega, and Gamma. Rho isn't nearly as well-known, but anyone who's ever studied econometrics, option pricing models, or applied finance knows all too well the importance of Rho. For inquiring minds, Rho measures sensitivity to current interest rates. Todays article is going to focus on the Greek symbol Theta. By now many readers may wonder why I continually capitalize the Greek symbols, and the reason is because they're that critical. The technical definition of Theta derived directly from Wikipedia when applied to options is as follows: "THETA measures the sensitivity of the value of the derivative to the passage of time: the 'time decay.' " Time decay (Theta decay) is of critical importance when an option trader is attempting to quantify and/or mitigate risk. There are two parts factored into the price of an option contract: extrinsic value (a major component of extrinsic value is Theta; the other is implied volatility) and intrinsic value (which would be the amount of money traders would gain if they exercised an option right away). A great many authors who opine about options get caught up using terminology like intrinsic and extrinsic value, which only serve to confuse most novice option traders even more. I refuse to use those words in my writing as I find them to be cumbersome, and option trading can be made much more difficult than it needs to be. Theta and time decay are synonyms when discussing options. An easy way to remember their congruence is that the word "time" starts with a T, as does Theta. If traders own calls or puts outside of any type of spread, they're totally exposed to time decay (Theta), and as an option contract gets closer to expiration, the time value of the contract diminishes. This, accompanied with failure to account for implied volatility, are the fundamental reasons why so many people lose money when trading options. Just as Theta can be an option traders worst enemy, it can also be used as a profit engine. If an option trader sells an option contract to open the position, that option trader is using Theta as a method to profit or as a way to reduce the cost of a spread. (This article won't spend a ton of time discussing various option spread techniques. At this point, the only attempt is to have you understand that Theta represents the time decay priced into an option.) It's also critical to understand that Theta (time decay) isn't linear in the time course of the life of
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exantefactor there is a correlation that seems to be escaping most that i think holds the key... more tomorrow on @Minyanville
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How To Profit From Theta When Trading SPX Options | Business News | Minyanville's Wall Street
1/6/2013
an option and accelerates rapidly the final two weeks before an option expires. The rapid time decay the final two weeks before expiration presents a multitude of ways to drive profitability, but it also can represent unparalleled risk. Since we're discussing Theta, I thought it would make sense to discuss a trade I took last week that utilized Theta as the profit engine. Recently, a variety of underlying indices, stocks, and ETFs have options that expire weekly. Weekly expiration expedites Theta and gives option traders additional vehicles to produce profits.
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How To Profit From Theta When Trading SPX Options | Business News | Minyanville's Wall Street
1/6/2013
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http://www.minyanville.com/investing/articles/theta-greeks-options-trading-Delta-Vega/8/11/2010/id/29549?page=full
How To Profit From Theta When Trading SPX Options | Business News | Minyanville's Wall Street
1/6/2013
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http://www.minyanville.com/investing/articles/theta-greeks-options-trading-Delta-Vega/8/11/2010/id/29549?page=full
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