From Theory To Practice - March 2, 2021 - What Does Negative Extrinsic Value Mean in Tastyworks

As premium sellers, we always put ourselves in a position to benefit from the simple passage of time. We do this by primarily selling out-of-the-money options, which yields a positive theta that will slowly decay the position’s extrinsic value in our favor. But in the event that the position moves in-the-money, then our theta becomes negative, and that same extrinsic value decay works against us. In this situation, the extrinsic value in tastyworks will be shown as a negative number.

In our portfolio, we see this phenomenon occurring in real-time with several positions that now have negative theta.