How to use theta in options?

Theta, a crucial concept in options trading, represents the rate of change in an option's value over time. This metric is essential for understanding the time decay factor inherent in options contracts.

Depending on the position taken, theta can manifest as either a negative or positive number. For long positions, theta is typically negative, reflecting the daily decline in the option's value as expiration approaches. Conversely, for short positions, theta is positive, signifying a daily increase in the value of the option over time.

The magnitude of THETA provides insight into the speed at which an option's value erodes. For instance, a theta value of -0.05 implies that the option's price will depreciate by five cents daily, indicating a relatively swift decline. This information is crucial for traders looking to manage their positions effectively.

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