How Does Time Decay (Theta) Affect the Profitability of the Overall Collar?
Time decay, or Theta, generally works in favor of the collar position. Since the investor is both long a put and short a call, the net effect of time decay is the difference in the Theta values.
Ideally, the net premium is received, meaning the sold call's Theta benefit (premium decay) is greater than the purchased put's Theta cost. Both options lose time value as expiration approaches.
Glossar
Collar
Framework ⎊ Options collars, within cryptocurrency derivatives and financial engineering, represent a neutral strategy constructed from a protective put and a covered call, designed to limit both potential gains and losses around a specific underlying asset price.
Time Decay
Erosion ⎊ ⎊ Time decay, within cryptocurrency options and financial derivatives, represents the systematic reduction in an instrument’s extrinsic value as its expiration approaches.