I know this was discussed earlier, but… option value=intrinsic + time value for deep in the money put options (european), schweser says:‘the put value may increase as the option approaches maturity given the option is close to maturity’. —> implies theta is positive!!! how is this possible? lets make an example (made up numbers): strike put 100 stock trades at 10. option value (close to maturity) = 90 + 3 = 93 so what do they mean when they say the price might increase. shouldn’t there be a convergence towards intrinsic value meaning 90.
This is a rare occasion, but it is possible for theta to be positive in this context. If you think of it intuitively you will probably understand. Consider $50 strike, bankruptcy announced, stock trading at $0.10, and three months till maturity. The holder cannot exercise for 3 months, but sees no further potential from holding due to the lower bound on the stock price. This means that the present value of the exercise price increases with time, intrinsic value stays the same, and thus time value must increase.
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A little level 1 action right there!
yes there is convergence towards intrinsic value. the example that you give for deep-in-money put should be modified as this: option value (close to maturity) = 90 - 3 = 87 (negative time value). the price of a deep in the money european put with little time to maturity left is approximately K*exp(-r*T)-S, which is less than the put’s intrinsic value of K-S
> ‘the put value may increase as the option approaches maturity given the option is close to > maturity’. —> implies theta is positive!!! It should say “'the put value may decrease …”
Dreary Wrote: ------------------------------------------------------- > > ‘the put value may increase as the option > approaches maturity given the option is close to > > maturity’. —> implies theta is positive!!! > > It should say “'the put value may decrease …” No, it shouldn’t. Theta has the potential to be positive in certain situations.
read Mobius response above.
why?
theta can be positive or negative - thanks for the answers. 
see page 125 for a more mathematical understanding of the BSM & theta. http://books.google.com/books?id=2sGwSAfA8eAC&pg=PA125&lpg=PA125&dq=deep+in+the+money+european+put&source=web&ots=IrYd5ASvvU&sig=ZpXDC3XkpOzTyaZxpX7PlgYEc4g&hl=en&ei=SMGdSdPqOdLjtgfG-7TXBA&sa=X&oi=book_result&resnum=5&ct=result#PPA125,M1