Option Block 385: Theta Decay

Trading Block: Business welcomes midterm GOP takeover, what can the market hope for from the GOP congress? U.S. stocks mixed as investors’ eye oil prices. Euro falls to two-year low after Draghi signals more ECB action. Tesla shares rallying after earnings.

Odd Block: Giant call traders in SPDR S&P Oil and Gas Explorers (XOP), puts trade in Geron Corp. (GERN), and large calls trade in Education Management Corp (EDMC)

Xpress Block: Alex discusses the methodology behind premium harvesting and the IdeaHub.

Mail Block: Listener questions and comments Question from Mukund Ambarge - Hi Team, I had a question on theta decay. I understand that delta is in constant flux with every tick move in stock, the delta/gamma changes. IV is in constant flux with buying and selling of options and volume etc. So Vega changes with option transactions. But theta decay is the only one which is always in a steady pace i.e. it’s not like it will decay quickly today and slowly tomorrow. The question is, when the theta decay is really adjusted in the prices of options. Do the theta decay get adjusted at every tick move - or every hour? If it is adjusted daily. Then when is the theta decay taken out of options. Early morning before start of trading? Or late in the day like last few minutes that whole days theta is taken out? Also I do not know when is weekend theta taken out of prices? Friday early morning or Friday ending or middle of the day? Basically when does market maker run the prices with the model and set the prices? Only once before trading starts or does he keep adjusting every minute/hour/tick based on demand/supply?

Around the Block: Where’s OX this week? Option Pit is hosting “Using Options to Trade Direction.”