Theta (Θ) lures option holders on time decay merits

As shown in the nutshell, there is no significant change in theta value even though the underlying exchange rate oscillates dramatically. (From spot 1.0894, even if it moves to any extreme directions 1.1044 or 1.0744 then Theta is not turning into positives).

Here, Theta was in the range of -21.9 to -25.93 when the options value at execution NZD 1316.55 on Call & NZD 1271.78 on put respectively.

Theta has not been that sensitive to option's value to the passage of time.

For ITM call option, as time to expiry draws nearer, Theta lowers and decreases. In this case of AUD/NZD long guts, the relative change is not significant.

Option basket: Long Guts (AUD/NZD)

As we advocated this strategy in our earlier post, we remain firm and re-iterate often and often by stating that Theta on this strategy signifying time decay advantage of the ITM options of this pair as shown in the diagram.

The long guts is a neutral strategy in options trading that involve the simultaneous buying of an ITM call option and an ITM put option of the same underlying currency and expiration date.

This is an unlimited profit on either side, limited risk to the extent of premium paid. The position is taken when the options trader thinks that the underlying stock will experience significant volatility in the near term.

These long guts are a debit spread as a net debit is taken to enter the trade.

Large gains for the long guts strategy is attained when the underlying currency price makes a very strong move either upwards or downwards at expiration.

The move in the underlying currency price must be strong enough such that either the long call or the long put rise enough in value to offset the loss incurred by the other option expiring worthless.