0
$\begingroup$

John Hull. Options, Futures, and Other Derivatives (2017 10 edn). p 408.

Theta is usually negative for an option.7 This is because, as time passes with all else remaining the same, the option tends to become less valuable.

7 An exception to this could be an in-the-money European put option on a non-dividend-paying stock or an in-the-money European call option on a currency with a very high interest rate.

u/BANG_BANG_SHRIMP alleges

Theta works in your favor if you are selling debit spreads.

Why? I know that Option writers benefit from time decay because the options that were written become less valuable as the time to expiration approaches. Consequently, it is cheaper for option writers to buy back the options to close out the short position.

enter image description here

Improve this question
$\endgroup$
2
  • $\begingroup$ Note that if you are "selling debit spreads" you are "doing credit spreads" (you are selling the high strike and buying the (cheaper) lower strike, collecting premium). So you are on the side of the trade that profits from time decay. (You hope time passes and S does not change, so you will keep your premium). It is as simple as that. $\endgroup$
    – nbbo2
    May 19, 2020 at 14:27
  • $\begingroup$ In general, On a Credit Spread, Theta works in your favour. $\endgroup$
    – nbbo2
    May 19, 2020 at 14:48

1 Answer 1

Reset to default
2
$\begingroup$

If both options are out of the money, your higher strike put (of which you are short) has a higher theta than your lower strike put (of which you are long). Thus earn more theta than you lose.

Improve this answer
$\endgroup$
2
  • $\begingroup$ Last sentence: rephrase to: Thus you earn more theta than you lose? $\endgroup$
    – Bob Jansen ♦
    May 19, 2020 at 11:07
  • $\begingroup$ Yes correct; thanks $\endgroup$
    – Lliane
    May 19, 2020 at 14:04

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service and acknowledge that you have read and understand our privacy policy and code of conduct.