The Effect of Moneyness and Stock Price
on Theta
Theta is not a constant. As variables influencing option values change, theta
can change, too. One such variable is the option’s moneyness. Exhibit 2.10
shows theoretical values (theos), time values, and thetas for 3-month
options on Adobe (ADBE). In this example, Adobe is trading at $31.30 a
share with three months until expiration. The more ITM a call or a put gets,
the higher its theoretical value. But when studying an option’s time decay,
one needs to be concerned only with the option’s time value, because
intrinsic value is not subject to time decay.
EXHIBIT 2.10 Adobe theos and thetas (Adobe at $31.30).
The ATM options shown here have higher time value than ITM or OTM
options. Hence, they have more time premium to lose in the same three-
month period. ATM options have the highest rate of decay, which is
reflected in higher thetas. As the stock price changes, the theta value will
change to reflect its change in moneyness.
If this were a higher-priced stock, say, 10 times the stock price used in
this example, with all other inputs held constant, the option values, and
therefore the thetas, would be higher. If this were a stock trading at $313,
the 325-strike call would have a theoretical value of 16.39 and a one-day