Our Theta obsession comes to a close in this week’s fourth and final post on the subject. I’ve checked every box and shared everything you need to know about all Theta’s intricacies. If you’re coming late to the game you’ll find the previous articles here, here, and here. To round out our investigation I’m sharing a story that recaps all that we know about sir Theta.

Though the lifespan of an option contract varies from one week to multiple years, its death date is known from inception. Following its creation by the powers that be and its listing on an options exchange, a clock begins to tick marking the passage of time until the inevitable end.

While each option possesses a set amount of extrinsic value (aka time value) when it first comes into being, a sneaky little thief called Theta relentlessly hounds the option, stealing a modicum of extrinsic value every day.

At first, Theta is timid, only looking to steal insignificant amounts of value from the option. With months to expiration, he has plenty of time to pilfer from the extrinsic value stash. Over time, however, Theta’s boldness builds. With each passing day, he brazenly withdraws increasing amounts of money from the option’s dwindling supply of extrinsic value. The rate of his thievery increases at an exponential rate.

Interestingly, Theta doesn’t steal from every option at the same pace, even if they have the same expiration date. Because at-the-money options are endowed with more extrinsic value than any other strike price, they are the most susceptible to Theta’s predatory antics.

To protect themselves against his thievery, traders look to buy longer-dated options.

While Theta is the foe of option buyers, he’s the friend to option sellers. As a matter of fact, all the money he is removing from the option’s value goes directly into the pocket of the option seller. This, of course, explains the appeal for option-selling strategies such as covered calls and naked puts. They allow you to dispatch the sneaky thief to incrementally steal extrinsic value and deliver it directly to your brokerage account. Traders looking to maximize Theta’s pirating look to sell shorter-dated options.

Whether you’re venturing into the options market with a penchant for speculation or risk aversion, don’t forget the role the Theta Thief will play throughout the duration of your trade.

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