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Theta
It is a measure of an option’s sensitivity to time decay. Theta is the change in option price given a one-day decrease in time to expiration. It is a measure of time decay (or time shrunk). Theta is generally used to gain an idea of how time decay is affecting your portfolio.
Theta is usually negative for an option as with a decrease in time, the option value decreases. This is due to the fact that the uncertainty element in the price decreases.
| Call option |
|
|
Change |
| Spot price |
1,070 |
1,070 |
0 |
| Exercise price |
1,080 |
1,080 |
0 |
| Interest |
10% |
10% |
0 |
| Volatility |
25% |
25% |
0 |
| Time(days to expiry) |
11 |
10 |
1 |
| Theta |
-352.5270 |
Anticipated Change |
-0.9738 |
| Option price |
15.5275 |
14.5460 |
-0.9814 |
In the example, the number of days has decreased by 1 therefore, this comes to about 0.2762% of a year (1/365). Therefore, the change of 1 day (decrease by 0.2739% of a year), the option value should change by 352.527*0.002739 = 0.97383. This is assuming there is no other change in the parameters.
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