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Options Myth #5

For Options Buyers Theta is Your Enemy

OPTIONS MYTH #5

For Options Buyers Theta is Your Enemy

Many online "Gurus" make this statement or some version of it. Another way you'll hear it is "I don't like paying the daily time decay." Listen up, the Top 1% understand that Theta is part of the game. More importantly, without Theta you can't get this...

TRANSCRIPT BELOW

TRANSCRIPT

For Options Buyers Theta is Your Enemy

I’ve heard many online experts make this statement or some version of it.

I’ve even heard this on CNBC.

Another way you’ll hear it is: “I don’t like paying the daily time decay.”

Well, let’s take it from the top.

Options are a tool that provide leverage.

You can buy the leverage or sell it.

If you are going to buy options, then you are receiving leverage.

A lot of leverage.

This means you can turn $1 into 3,4,5 or $10. Or even more. However, having the ability to do that doesn’t come for free.

A Cost to Leverage

The premium you pay, is the value of that opportunity.

Theta, or the measure of the options' daily time decay, is not your enemy. It’s the price for the leverage you are receiving from that option.

And if you sell options, the theta is the payment you receive for the leverage you are giving away to others.

Let’s think about it another way.

Insurance offers leverage. We can think about home insurance.

You pay a monthly premium that you don’t get back unless the trigger event happens.

Do you expect an insurance company to give you insurance on your house over a certain period of time without paying the monthly fee? 

Of course not.

Do you feel that you lost money because nothing bad happened to your home?

You shouldn’t. Why?

First, nothing happened to your home. And second, when you started the policy you saw the value IF something might happen to your home. 

Buying Options is similar.

Focus on This Instead of Theta

You pay the options premium for the opportunity to extract leverage if the trigger event happens. With options, the trigger event is your Target Stock Price.

The questions become:

  1. Does your Target Stock Price warrant the use of options?
  2. Which option do you choose?

That’s what the existing options education doesn’t explain.

I’ve created new options education with simpler concepts to help everyone understand how to use them just like the Top 1% of investors do. I've removed the focus away from the Greeks, including Theta, to help investors concentrate on what's import - risk-reward.

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Options Myth #5

For Options Buyers Theta is Your Enemy

OPTIONS MYTH #5

For Options Buyers Theta is Your Enemy

Many online "Gurus" make this statement or some version of it. Another way you'll hear it is "I don't like paying the daily time decay." Listen up, the Top 1% understand that Theta is part of the game. More importantly, without Theta you can't get this...

TRANSCRIPT BELOW

TRANSCRIPT

For Options Buyers Theta is Your Enemy

I’ve heard many online experts make this statement or some version of it.

I’ve even heard this on CNBC.

Another way you’ll hear it is: “I don’t like paying the daily time decay.”

Well, let’s take it from the top.

Options are a tool that provide leverage.

You can buy the leverage or sell it.

If you are going to buy options, then you are receiving leverage.

A lot of leverage.

This means you can turn $1 into 3,4,5 or $10. Or even more. However, having the ability to do that doesn’t come for free.

A Cost to Leverage

The premium you pay, is the value of that opportunity.

Theta, or the measure of the options' daily time decay, is not your enemy. It’s the price for the leverage you are receiving from that option.

And if you sell options, the theta is the payment you receive for the leverage you are giving away to others.

Let’s think about it another way.

Insurance offers leverage. We can think about home insurance.

You pay a monthly premium that you don’t get back unless the trigger event happens.

Do you expect an insurance company to give you insurance on your house over a certain period of time without paying the monthly fee? 

Of course not.

Do you feel that you lost money because nothing bad happened to your home?

You shouldn’t. Why?

First, nothing happened to your home. And second, when you started the policy you saw the value IF something might happen to your home. 

Buying Options is similar.

Focus on This Instead of Theta

You pay the options premium for the opportunity to extract leverage if the trigger event happens. With options, the trigger event is your Target Stock Price.

The questions become: 

  1. Does your Target Stock Price warrant the use of options?
  2. Which option do you choose?

That’s what the existing options education doesn’t explain.

I’ve created new options education with simpler concepts to help everyone understand how to use them just like the Top 1% of investors do. I've removed the focus away from the Greeks, including Theta, to help investors concentrate on what's import - risk-reward.

BACK TO MAIN MENU

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