A:

Theta is an option Greek that measures the rate of change in an option's value with respect to the passage of time. When an option has a negative theta, it measures the rate at which the option loses its time value every day as the time to expiration decreases. If the option has a positive theta, which occurs when the option position is net short, the option gains in value as the time to expiration decreases.

A credit spread is an option trading strategy that involves simultaneously buying a lower premium option and writing a higher premium option in the same underlying asset with the same expiration date. The trade yields a net credit when opening the position and profits if the spread narrows. Since this is a short position, the overall theta of the strategy is positive. Therefore, the position appreciates in value as the expiration date gets close.

For example, an investor buys one call option with a strike price of $30 for $1 and simultaneously writes one call option with a strike price of $25 for $4. The net credit received is $3 ($4 - $1), or $300, since an equity option has a multiplier of 100. The net credit is the maximum profit the investor can receive. Suppose the theta of the overall position is 0.1; the position appreciates in value by $10 per day if all things remain equal. In this case, the investor is betting that the time decay of the position will increase and the stock price will be below $25.

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