How Does Theta Decay Impact the Cost and Effectiveness of a Short-Term Options Hedge?
Theta decay, the time value erosion, rapidly reduces the option's value as expiration approaches. For a short-term hedge, this decay means the option loses its protective value quickly, requiring frequent re-hedging or rolling.
While the initial cost is lower, the rapid decay can make the hedge less effective and potentially more costly to maintain over time.
Glossar
Short-Term
Horizon ⎊ Short-term, within cryptocurrency and derivatives, typically denotes a timeframe extending to one month, influencing trading strategies focused on volatility capture and rapid profit realization.
Theta Decay
Time Decay Quantification ⎊ Theta measures the rate at which an option's value decays due to the passage of time, representing the daily loss in extrinsic value for the option holder, assuming no change in the underlying price or volatility.
Theta Decay Impact
Erosion ⎊ This refers to the systematic reduction in an option's extrinsic value as time elapses toward the contract's expiration date.