From Mock 2: “The call option price will decrease as the time to expiration decreases.” This is labeled as true and the explanation is “As expiration approaches, the price of the option moves toward the payoff value of the option at expiration, a process known as time decay.” After sitting here for 5 min talking out loud to myself, I think I understand it like this: Increase in theta = time decay = passage of time. But logically, as theta increases (i.e. time is decaying/passing), the time to expiration is decreasing. So time to expiration decreases = theta increases = the option value goes down. This seems right and would explain the Mock Q, except Schweser page 269 book 5 labels theta as “time to expiration”, throwing off the whole theory. Any help?
theta is jus time the more of it u have the more valuable the option …capiche
when theta increases, option value decreases. so, no.
basically stated more simlpy, the exam problem is saying that theres a positive relationship between time to expiration and option value. schweser page 269 book 5 is saying that as time to expiration increases, option value decreases. so i think the “time to expiration” phrase doesnt mean theta really
theta is positively related to calls and negatively related to puts Exception: When close to maturity and deep ITM, theta is positively related to puts
We all seem to be forgetting that Theta is a negative figure.
theta is not time it’s sensitivity to time theta is less that zero for both calls and puts except deep in the money puts when it MAYBE positive but still maybe negative just look at option this way you buy one because you hope stock will go up or down. More time more chance it will go up or down. As time goes on there is less chance and the value of the option decreases (put or call) Theta measures this sensitivity. If one stock is really volatile than even as time goes on there is chance to make money on the option and theta is low compared to a relatively stable stock where as time goes on there is much less chance of making money. Higher theta just means that your option value decreases faster as time passes by. Mock question doesn’t really have anything to do with theta. Hope this helps.
i mean theta is negative. its in the chart in the book. it represents time decay. my issue is with the term time to expiration.
what’s the issue? time to expiration is time left before the option expires, time to expiration decreases as time goes on.
CFA=NOLIFE Wrote: ------------------------------------------------------- > theta is not time it’s sensitivity to time > > theta is less that zero for both calls and puts > except deep in the money puts when it MAYBE > positive but still maybe negative > > just look at option this way you buy one because > you hope stock will go up or down. More time more > chance it will go up or down. As time goes on > there is less chance and the value of the option > decreases (put or call) > > Theta measures this sensitivity. If one stock is > really volatile than even as time goes on there is > chance to make money on the option and theta is > low compared to a relatively stable stock where as > time goes on there is much less chance of making > money. > > Higher theta just means that your option value > decreases faster as time passes by. > > Mock question doesn’t really have anything to do > with theta. Hope this helps. nolife ur correct i was hoping to present an intuitive way to think bout it
when i came across that question i just wrote out the put-call parity relation to see what happened to C0 as t got smaller