Theta & People

Theta is one of the “greeks” used in the Black-Scholes formula for pricing options. Essentially when trading options the value of the option declines over time as it gets closer to the expiration day for the given contract. This is called theta, and in layman’s terms, time decay. To beat time decay you need the stock to continue moving up, and those upwards moves in value must be big enough to outweigh the negative effects.

As someone constantly worrying about theta at work, I think it’s a principal that can apply to your personal life as well. For simplicity we can classify relationships into stock and options (we could talk about commodities as well, but maybe another time).

Close friends are people that always will be in your life and don’t experience time decay. They are stocks. You make an investment in them and hold, hoping to grow that investment (relationship) and know that even though it has its ups and downs, it will always have some sort of value to you. Sometimes you realize that the money could be better used elsewhere so you sell, but for the time you held your shares, you were still an investor in the company (relationship).

Conversely, there are relationships that are merely options. You invested a little bit to have the right to convert it into stock. You have a finite amount of time to work on these relationships at the start of the contract and as time takes its toll and you see no progress, it decays the value of the potential relationship. By not increasing the value of the relationship to the strike price (lets call this the point where there’s a real connection, friendly or otherwise) you have no way of converting that option to stock. It expires worthless.

Like options, different people buy different length contracts for different situations. If you meet someone through a friend versus at a bar, maybe they get a slightly longer contract, thus reducing time decay, and having more of an opportunity to convert. There are tons of different scenarios, but I think I’ve made my point.

In a city like New York, relationships can be hard to maintain. Everybody has a lot going on, and because of this people can get wrapped up in their own lives, routines, and bubbles. It can be the loneliest place on earth, despite the 8m+ people, or the greatest place, so I think it’s important to make sure to dabble in options, but guard your stock closely. It’s more valuable than you know.

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