Chapter 40: Advanced Concepts 
FIGURE 40-7. 
Theta comparison, with XYZ = 50, t = three months. 
-16 
Very High Volatility 
-14 
-12 
0 0 
T"" 
X 
~ 
-10 
.i::: 
I-
-8 Low Volatility 
-6 
0 
40 45 50 55 60 
Strike Price 
TABLE 40-7. 
863 
65 
Theta comparison for differing volatilities (XYZ = 50, t = 3 months). 
Strike low Volatility Medium Volatility High Volatility 
40 -0.005 -0.008 -0.013 
45 -0.007 -0.010 -0.014 
50 -0.008 -0.010 -0.015 
55 -0.007 -0.010 -0.016 
60 -0.006 -0.009 -0.016 
65 -0.004 -0.008 -0.015 
to lose value. This does not change the fact that, for very short-term options, the theta 
is largest at-the-money. 
Normally, the theta of an individual option is of little interest to the strategist. 
He generally would be more concerned with delta or gamma. However, as with the 
other risk measures, theta can be computed for an entire portfolio of options. This 
measure, the "position theta," can be quite important because it gives the strategist 
a good idea of how much gain or loss he can expect on a daily basis, due to time ero­
sion. The following example demonstrates this point. Note that the underlying secu­
rity itself has a theta of zero, since it cannot lose any value due to time decay.