One of the nice things about converting theta into dollars per day at the position level is that it allows for comparison across products. Unlike delta and gamma, which are hard to compare across products, traders can compare theta levels between underlying assets. Comparing the total theta exposure for two products or portfolios gives traders a quick-and-dirty way to estimate the positions' relative optionality.

Risk managers can also use theta combined with a common denominator as a tool to compare the optionality of different-sized portfolios. One of the metrics we use to help ensure our clients' option exposures are similar is to look at theta-per-acre in each product and as a whole. That way, we know that we can expect similar results for each of our producers despite their different total acreages and planting decisions on those acres.

Our article on gamma mentioned that gamma and theta are usually opposing forces in a portfolio. Typically, owning gamma involves paying theta and vice versa. Some exceptions exist in complex options positions, but we will cover those in the future. That article also hinted at the option replication process. Replication is a process where traders lean on their positive gamma to offset their negative theta or their positive theta to mitigate their negative gamma. We will cover that process more in a future article as well.

Inexperienced option traders often think selling options grants them a daily "theta check." If that were true, life would be easy. Everyone could sell options all the time and make a great living (but who would they sell them to?). In reality, if the implied volatility at which the option trades is correct, a well-managed option portfolio should not change much in value over time. This stability develops because the profits or losses from a dynamic delta hedging strategy can offset the portfolio's time decay.

Properly managing options positions is the key to long-term survival in the options market. With enough time and dedication, we believe that anyone can learn to do this. We also think the learning process is a long and difficult one, filled with many pitfalls. That second belief is one reason our Quartzite Precision Marketing clients choose to leverage our knowledge and experience.

Options often fail to meet their owners' expectations because many people think of options as buy and hold investments. Theta is one of the reasons they are not. A well-designed option strategy will work to offset theta with active management. Unfortunately, retail commission rates can quickly get in the way of proper portfolio management. If you are going to trade options and manage them well, you need to pay as low of commissions as possible. If there is one thing that will eat away account values faster than unmanaged theta, it is full-priced retail commissions.

In the end, theta is one of the many tools for measuring and managing risk. Like the other greeks, mitigating theta requires a deep understanding of the process of time decay and strategies to work around that decay. Thanks for taking the time to read, and as always, we look forward to your questions and feedback.