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Traders Glossary

Theta (decay)

Definition

The sensitivity of an option price to the variable of time. Remember that options only have a finite life (until Expiration), therefore theta is an extremely important sensitivity to consider.

Related Terms
Delta

The amount by which an option premium moves divided by the dollar for dollar movement in the underlying asset.

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Delta Hedge

A strategy designed to protect the investor against directional price changes in the underlying asset by engineering the overall position delta to zero.

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Delta Neutral

Where a spread position is engineered so that the overall position delta is zero.

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