Theta
TradingDefinition
Daily time decay of an option's value. Long options pay theta (lose value as time passes); short options collect theta. ATM options have the highest theta near expiration.
Selling vol = collecting theta. Premium-selling strategies (covered calls, cash-secured puts, iron condors) earn theta in exchange for accepting tail risk. Theta acceleration in the final 30 days of an option's life is the source of most short-vol profit.
Selling vol = collecting theta. Premium-selling strategies (covered calls, cash-secured puts, iron condors) earn theta in exchange for accepting tail risk. Theta acceleration in the final 30 days of an option's life is the source of most short-vol profit.