How Does Theta (Time Decay) Influence the Potential for Slippage over a Longer Holding Period? ▴ Learn

How Does Theta (Time Decay) Influence the Potential for Slippage over a Longer Holding Period?

Theta measures the rate at which an option's price declines due to the passage of time. Over a longer holding period, the cumulative effect of Theta decay is significant.

While not direct execution slippage, it is a form of guaranteed value erosion. For a short option position, Theta is beneficial; for a long position, it is a cost.

This predictable decay influences the mid-price over time, making the potential execution price (if closed) lower, which is a form of value slippage.

Why Do Options with Longer Time to Expiration Have Lower Daily Theta?

What Is the “Mid-Price” of an Option and Why Is It Often Used as a Benchmark?

How Does the Concept of “Skewness” in the Implied Volatility Surface Affect the Mid-Price Calculation?

What Is the Practical Implication of a “Wide Mid-Price” in an Illiquid Options Market?