Why Is Theta Typically Negative for a Long Option?
Theta is typically negative for a long option position (buying a call or put) because time decay reduces the option's value over time. Since the option buyer wants the option's value to increase, the daily erosion of time value represents a loss for them, hence the negative Theta.
Glossar
Option Buyer
Premia ⎊ An option buyer, within cryptocurrency derivatives, initiates a position predicated on a directional view, acquiring the right, but not the obligation, to buy or sell an underlying asset at a predetermined price on or before a specified date.
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.
Time Value
Component ⎊ Time value, also known as extrinsic value, is a component of an option's premium that reflects the probability of the underlying asset's price moving favorably before the option expires.
Theta
Decay ⎊ Theta, within cryptocurrency options and financial derivatives, quantifies the rate of extrinsic value loss as time passes, representing a critical component of options pricing models.
Long Option Position
Position ⎊ A long option position, within cryptocurrency derivatives, represents the right, but not the obligation, to purchase an underlying asset at a predetermined price (the strike price) on or before a specific date (the expiration date).
Long Option
Position ⎊ A long option position involves purchasing an options contract, granting the holder the right, but not the obligation, to buy or sell an underlying asset at a specified price before or on a certain date.