What is Theta? Complete Guides [2024] Advantages & Disadvantages

Theta is blockchain protocol that seeks to incentivize a global network of computers to operate a decentralized video streaming platform. 

Today, content delivery networks (CDNs), geographically located networks of operators, are paid to deliver video stream content to end-users. Due to being restricted by their locations, existing CDNs can’t keep up with increasingly high-quality streams.

It allows its global pool of users to relay videos by offering their spare bandwidth and computing resources and rewards them for doing so.

As more users join this network, more bandwidth is available, thus improving the streaming quality of the videos on the network. 

Central to running the operations on its blockchain, it boasts two native cryptocurrencies, THETA coin, for voting on changes to the protocol, and TFUEL, for executing transactions. 

It is also open-source. It claims that this increases the potential for anyone to create new applications and services on top of it. 

Who created Theta?

It was founded in 2017 by Mitch Liu, who founded startups in mobile gaming and online advertising, and Jieyi Long, who previously worked on VR live streaming technologies. 

Notably, its board of advisers include Steve Chen, YouTube co-founder, Justin Kana, Twitch co-founder, and Rakuten Viki and CJ Hello, senior executives from Verizon. 

The Theta team held a private token sale in 2017, raising the equivalent of $20 million by selling 30% of the 1 billion unit supply of its THETA cryptocurrency.

How does Theta work?

Theta is a network powered by three groups of participants:

• Enterprise Validator Nodes – Companies who stake this token for the right to process transactions on the network. Current Validator Nodes include Google and Samsung. 
• Guardian Nodes – Users who perform work to ensure that the transaction blocks proposed by the Enterprise Validator Nodes are accurate. 
• Edge Node – Users who either share their bandwidth or relay video streams over this network in return for TFUEL. 

This network also allows developers to build decentralized applications on top of its blockchain. Examples include royalty distribution applications and crowdfunding mechanisms. 

This network users can download an official Theta Wallet app to hold or stake their THETA and TFUEL tokens. 

It also has built a micropayment system for video streaming purposes that allows content viewers and creators to send and receive THETA via the official wallet app.

Understanding Theta

Options give the buyer the right to buy or sell an underlying asset at the strike price before the option expires. The strike price, also called an exercise price, is set when the contract is first written for the price the underlying asset must reach before the option can be exercised.

Options Greeks, or simply “Greeks,” are invaluable tools for these investors. The mathematical variables help investors calculate the risks that influence an option’s price, especially as it nears its expiration.

Time is one of the risks for option buyers since options are only exercisable for a certain period. Simply stated, an option’s profitability decreases as time goes on. It measures the time decay or erosion of an option’s value as time passes.

What happens when two options are similar and one expires after a longer period? The value of the longer-term option is higher since there is more time during which the option could move above the strike price.

It is generally expressed as a negative number for long positions. The option’s value diminishes as time passes until the zero time value when the option expires. This is why theta is good for sellers and not so for buyers—value decreases from the buyer’s side as time goes by and increases for the seller.

Hence, selling an option is known as a positive theta trade: as theta increases, so do sellers’ earnings on their options.

Time Decay and Option Values

If all else remains the same, the time decay causes an option to lose extrinsic value or premium as it approaches its expiration date. Therefore, it is one of the main Greeks that option buyers should pay attention to, given that time is not on their side if they are long option holders.

Conversely, time is on the side of the investor who writes options. Option writers benefit from time decay because options become less valuable as the time to expiration decreases. Consequently, it is cheaper for option writers to buy back the options and close out the short position.

Put differently, option values are, if applicable, composed of extrinsic and intrinsic values. At option expiration, all that remains is the intrinsic value, if any, because time is a significant part of the extrinsic value.

Theta vs. Other Greeks

The Greeks measure the sensitivity of options prices to their respective variables.

For instance, the delta of an option indicates the sensitivity of an option’s price in relation to a $1 change in the underlying asset, while the gamma indicates the sensitivity of an option’s delta with regard to a $1 change in the underlying security.

Vega indicates how an option’s price theoretically changes for each one percentage point move in implied volatility.

Example of Theta

Imagine you’re interested in buying a call option for a stock named “TechCo.” The stock is trading at $50, and you’re looking at a call option with a $52 strike price, expiring in 30 days. This option costs $2 per share or $200 for a standard options contract that covers 100 shares.

Suppose the theta for this option is -0.05. If everything else (stock price, volatility, interest rates, etc.) stays the same, the option will lose five cents per day in value just because time is passing.

Fast forward 10 days, and you find that TechCo’s stock price hasn’t changed. If all else stayed the same, the value of your option should have decreased only because of theta or time decay. Specifically, you’d expect a drop of 50 cents (10 days multiplied by the theta, -0.05) in the option’s price. That would mean your $2 option is now worth $1.50.

Hence, understanding it helps you grasp how the ticking of the clock affects your options investments. Time decay gradually erodes an option’s value as the expiration date approaches. Knowing this can help you make more informed decisions for your trading strategy.

Is It Good for Options?

In options trading, a positive theta equals the selling time for a short options seller. As time moves forward, the option becomes cheaper, which is good for the seller. This option seller will profit if the underlying asset is neutral, bearish for a short call, and bullish for a short put.

Which Option Has the Highest Theta?

The highest theta is for at-the-money options, and the lowest is for the furthest out-of-the-money and in-the-money options. For an option that is at the money or nearly so, the absolute value of theta rises as the expiration date is reached.

Does Theta Decay on Weekends?

Yes, theta decays on weekends. Options models usually take into consideration weekends, so decay will occur over seven days for five trading days.

Can Theta Be Positive, and What Would That Mean?

It can appear positive, particularly when you’re short (or “writing”) an option. If you’ve sold an option, the passage of time works in your favor, making the option less valuable—which is good when you eventually buy it back at a lower price or let it expire worthless. In the case of selling options, while the theta of the option itself is still technically negative, the effect on your position is positive.

How Does Theta React to Volatility in the Market?

Theta and volatility have a complex relationship. Generally speaking, when market volatility is high, option prices go up, which can also cause theta to increase. This is because the higher premium associated with the option will have more to lose each day as it approaches expiration.

However, it’s important to understand that an increase in theta doesn’t necessarily mitigate the impact of rising volatility. In a volatile market, the option price can swing dramatically quickly, overshadowing the slow erosion of time decay. So, while it might increase in a high-volatility market, the option’s price could still rise if the increased volatility is even more significant.

Disadvantages

While it aiming to revolutionize video streaming, faces some challenges:

• Competition: Established giants like YouTube and Twitch have a massive user base. It needs to keep innovating and attracting users to compete effectively.
• Limited Integration: It might not integrate as seamlessly with other blockchains compared to some competitors. This can hinder asset movement across different blockchain networks.
• Scalability: As the number of users and transactions on Theta increases, maintaining smooth operation and fast transaction speeds can be complex.
• Centralization Concerns: While the network itself is decentralized, a relatively small number of large corporations act as validator nodes. This raises concerns about true decentralization.
• Token Distribution: The initial sale of these tokens wasn’t open to the public, with a significant portion held by early investors. A mass sell-off by these investors could impact the token’s price.
• Staking Complexity: While it utilizes a Proof-of-Work system, staking THETA itself isn’t straightforward. It often involves using DeFi platforms on other blockchains, which can be intricate for beginners.

These are some of the potential drawbacks to consider when evaluating its potential.

Advantages

Theta offers several advantages that aim to address limitations of traditional video streaming:

• Reduced Costs: It leverages a peer-to-peer network for content delivery, potentially reducing bandwidth costs for content creators and distributors. Viewers with spare bandwidth can contribute to the network and earn rewards.
• Improved Quality: Its network can potentially deliver smoother, higher-quality streams by eliminating bottlenecks and inefficiencies often present in centralized systems.
• Enhanced Content Discovery: It integrates blockchain technology, allowing for a more transparent and efficient content recommendation system. This could benefit both viewers and creators.
• Direct Monetization: It allows creators to directly monetize their content through viewer contributions and targeted advertising within the streaming platform.
• Data Ownership: It aims to give users more control over their data. Users can choose to share bandwidth and earn rewards, or opt out entirely.
• Content Incentive: Its tokenized system incentivizes viewers to contribute bandwidth and creators to produce high-quality content.

These advantages position Theta as a potential disruptor in the video streaming landscape, offering a more efficient, user-centric alternative to current models.

How to Buy Theta?

There are a few ways to buy Theta, including using a credit card, peer-to-peer trading, or trading other cryptocurrencies for it. Here’s a general overview of the process:

1. Choose a crypto exchange: There are many cryptocurrency exchanges that allow you to buy it. Some popular options include Binance, KuCoin, Bybit, and WazirX. Do your research to compare fees, security measures, and available payment methods before choosing an exchange.
2. Create an account and verify your identity: You’ll need to create an account on your chosen exchange and go through a verification process to comply with anti-money laundering (AML) regulations. This typically involves providing your name, address, and photo ID.
3. Deposit funds: Once your account is verified, you’ll need to deposit funds to buy it. Payment methods vary by exchange, but some exchanges allow deposits using credit cards, debit cards, wire transfers, or other cryptocurrencies.
4. Buy THETA: Once you have funds in your account, you can place an order to buy it. You can choose a market order to buy at the current market price or a limit order to buy at a specific price.

Here are some resources that provide more detailed instructions on how to buy it on specific exchanges:

• Binance
• Coinbase
• Bybit

Important things to remember:

• Cryptocurrency is a volatile investment. Its price can fluctuate significantly, so be sure you understand the risks before you invest.
• Choose a reputable exchange. Make sure the exchange you use has a good security record and is compliant with regulations.
• Never share your private keys with anyone. Your private keys are what give you access to your cryptocurrency. If you share them with someone, they will be able to steal your THETA.

Modified Byzantine Fault Tolerance (BFT)

Central to Theta is the modified BFT, a proof-of-stake (PoS) governance mechanism that keeps the distributed network of computers running Theta Network in sync.

Theta’s consensus mechanism differs from traditional PoS in that both validator and guardian nodes participate in the consensus mechanism, adding an extra level of security to the protocol. 

These nodes must stake it tokens in order to help power the blockchain, produce blocks and vote on changes. Validator nodes are required to stake a minimum of 10,000,000 THETA while Guardian Nodes need to only stake 100,000 THETA.

Of note, voting power is determined by the amount of it staked.

Why is theta important to know?

An option’s time value will head to zero as it gets closer to its expiration date. This is true whether the option is in or out of the money.

Time decay is a big risk in options trading. For example, if you buy a call option with a $35 strike price on a stock that trades for $38 per share and pay $5 for the option, it has $3 of intrinsic value and $2 of time value.

How is It Calculated?

When the value of a long position of an option falls, the closer it is to maturity, which shows an inverse relationship. For long positions on an option, theta is generally negative, and for short positions on an option, theta is generally positive. It can be shown in the following general form:

Where:

• ∂ – the first derivative
• V – the option’s price (theoretical value)
• τ – the option’s time to maturity

Under the Black-Scholes model, the calculation for theta is given by:

Where:

• S – the stock price
• K – the strike price
• r – the risk-free rate
• q – the annual dividend yield
• τ – time until expiration
• σ – the volatility

What is Theta Used for in Options?

As stated above, it is used to gauge the sensitivity of the option value to time. It can be used to see how much value an option loses on a daily basis, and how much the underlying asset will need to change to offset the loss in according to theta. The measurement is not used by traders as often as other measures such as delta. However, buyers may still want to know what to expect in terms of time changes to an option. Option writers who take a short position may also consider theta since they will benefit from the time decay.

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