Theta is the next letter in Option Greeks. But, before we get into the details, let’s start with the basics!
Time equals money.
Remember the phrase “time is money”? When it comes to options trading, you should keep this aphorism close at hand. But, for the time being, let’s put the Greek nonsense aside and return to my trip to Goa. If you recall, I spent 14 days in Goa. That’s quite a long time for a home vacation! I wanted to discover the best off-the-beaten-path experiences in Goa. Do you suppose I just got on a plane and flew away? Or do you believe I planned before leaving for my long vacation?
That’s true, before I began my vacation or even agreed to spend fourteen days in Goa, I spent time carefully arranging. In fact, one of the reasons my vacation was such a success was precise because I spent so much time researching the best locations to stay, hidden beaches to visit, and top restaurants to eat at. Without it, my trip would have been chaotic, and I would not have made the most of my time in Goa. So, let us put this in perspective and calculate the likelihood of passing the exam versus the time spent preparing for it.
Obviously, the more time spent researching, the better the prospects of a successful vacation.
Using the same approach, consider the following scenario: the Nifty Spot is 8500, you buy a Nifty 8700 Call option; what is the likelihood that this call option will expire in the money (ITM)? Let’s take a closer look at this:
Given that the Nifty is currently at 8500, what is the possibility of the Nifty moving 200 points in the next 30 days, and hence the 8700 CE expiry ITM?
The chances of Nifty moving 200 points in the next 30 days is extremely high, hence the likelihood of an option expiring ITM upon expiry is quite high.
What if the time limit is only 15 days?
Expecting the Nifty to move 200 points in the next 15 days is fair, hence the likelihood of the option expiring ITM at expiry is strong (notice it is not very high, but just high).
What if you only have 5 days before your subscription expires?
Because 5 days is a fairly small period of time to allow for a 200-point increase, the likelihood of 8700 CE expiring in the money is limited.
What if you only had one day to live?
The likelihood of the Nifty moving 200 points in a single day is pretty minimal, so I am reasonably positive that the option will not expire in the money.
So, what can we deduce from the preceding data? Clearly, the longer the period until expiry, the more likely the option will expire in the money (ITM). Keep this in mind when we move our attention to the ‘Option Seller.’
Option Vendor
We already know that an option seller sells/writes an option and earns a premium for it. When he sells an option, he intends to carry an option with limitless risk and limited profit potential. The prize is only as large as the premium he receives. Only if the option expires worthless does he get to keep his entire prize (premium). Now, think about this, if he is selling an option early in the month he very plainly understands that:
He carries a limitless risk with a limited possible payoff.
There is a potential that the option he is selling will convert into an ITM option over time. This means he will not be able to keep his reward, which is the premium earned.
Due to the passage of time, there is always the possibility that the option will expire in the money. However, as the expiry date nears, the likelihood of this happening decreases. Given this, you might question why an option seller would want to sell options at all. After all, why would you sell options if the option you’re selling has a chance of expiring in the money? There is no doubt that time is a significant risk in the context of an option seller.
Let’s look at another example. What if the option buyer promises to compensate for the time risk that the option seller assumes in order to persuade the option seller to sell options? In such a circumstance, weighing time risk versus compensation is the prudent course of action. This is exactly what occurs in real-world options trading.
When you pay a premium for options, you are actually paying for:
The intrinsic value of options is based on time risk.
As a result, Premium equals Time Value + Intrinsic Value.
What exactly is Theta?
Theta is a measure of the rate at which the value of an option or its premium depreciates over time. Time decay is the gradual deterioration of an option’s value or price as time passes. With the passage of time, the likelihood of an option being lucrative or in the money decreases. In reality, as the expiration date of an option approaches, time decay accelerates since there is less time to profit from the trade.
Because time travels in the same direction, theta is always negative for a single option.
Consider this: as soon as a trader purchases an option, the clock starts ticking, and the option’s value swiftly begins to decline until it expires on the predetermined expiration date. This means that Theta values for long options are always negative and have a zero time value at expiration because time only goes in one direction and time runs out when an option expires.
Theta is beneficial to sellers but detrimental to purchasers.
How Do You Trade Options With Theta?
Theta value, also known as temporal decay, is a “silent killer” for option buyers since it signals a decrease in the value of the option owned by the buyer. Theta, on the other hand, is a beneficial situation for the seller, who gains from the buyer’s delay in exercising the option.
As a result, the general strategy should be to purchase options with a longer lead period to expiration in order to reduce the effect of time decay and minimize Theta loss on options.
How does Theta function?
Theta is a network that is fueled by three distinct types of participants:
Enterprise Validator Nodes — Businesses that stake THETA tokens in exchange for the privilege to process network transactions. Google and Samsung are two of the current Validator Nodes.
Guardian Nodes — Users who work to guarantee that the transaction blocks offered by Enterprise Validator Nodes are correct.
Edge Node — A user who, in exchange for TFUEL, shares their bandwidth or relays video feeds over the Theta network.
Developers can also construct decentralized applications on top of the Theta network’s blockchain. Applications for royalty distribution and crowdfunding techniques are two examples.
To hold or bet their THETA and TFUEL tokens, Theta network users can download the official Theta Wallet app.
Theta has also created a micropayment system for video streaming that allows content watchers and creators to give and receive THETA through the official wallet app.
Byzantine Fault Tolerance Modified (BFT)
The modified BFT, a proof-of-stake (PoS) governance mechanism that keeps the dispersed network of machines running Theta Network in sync, is central to Theta.
Theta’s consensus process differs from typical PoS in that it involves both validator and guardian nodes, offering an extra layer of security to the protocol.
To assist power the blockchain, produce blocks, and vote on modifications, these nodes must stake THETA tokens. Validator nodes must invest a minimum of 10,000,000 THETA, but Guardian nodes must deposit only 100,000 THETA.
It is worth noting that voting power is determined by the amount of THETA staked.
Who invented Theta?
Mitch Liu, who previously developed firms in mobile gaming and online advertising, and Jieyi Long, who previously worked on VR live streaming technology, founded Theta in 2017.
Notable members of Theta’s advisory board include Steve Chen, co-founder of YouTube, Justin Kana, co-founder of Twitch, and Rakuten Viki and CJ Hello, senior executives from Verizon.
In 2017, the Theta team staged a private token sale, raising the equivalent of $20 million by selling 30% of the THETA cryptocurrency’s 1 billion unit supply.
Why is THETA valuable?
THETA is the coin that powers the Theta Network, and it can be staked by individuals interested in becoming Validator or Guardian nodes.
THETA enables nodes to validate transactions, generate blocks, vote on network modifications, and receive TFUEL as a reward.
TFUEL is also used to pay for transactions on Theta and as the micropayment currency when users pay Edge Nodes to share a video feed.
Finally, developers who want to launch a new application on the Theta Network use TFUEL for smart contract deployment and operation.
THETA, like many other cryptocurrencies, has a limited supply, which means that according to the software’s rules, there will only ever be 1 billion THETA.
Why should you use THETA?
Active content creators who want more control over their movies and the monetary system utilized to compensate them may be interested in Theta.
If they believe in the future of shared video streaming services, investors may choose to add THETA to their portfolios.
