25 lines
1.6 KiB
Plaintext
25 lines
1.6 KiB
Plaintext
Friend or Foe?
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Theta can be a good thing or a bad thing, depending on the position. Theta
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hurts long option positions; whereas it helps short option positions. Take an
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80-strike call with a theoretical value of 3.16 on a stock at $82 a share. The
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32-day 80 call has a theta of 0.03. If a trader owned one of these calls, the
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trader’s position would theoretically lose 0.03, or $0.03, as the time until
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expiration change from 32 to 31 days. This trader has a negative theta
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position. A trader short one of these calls would have an overnight
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theoretical profit of $0.03 attributed to theta. This trader would have a
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positive theta.
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Theta affects put traders as well. Using all the same modeling inputs, the
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32-day 80-strike put would have a theta of 0.02. A put holder would
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theoretically lose $0.02 a day, and a put writer would theoretically make
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$0.02. Long options carry with them negative theta; short options carry
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positive theta.
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A higher theta for the call than for the put of the same strike price is
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common when an interest rate greater than zero is used in the pricing
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model. As will be discussed in greater detail in the section on rho, interest
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causes the time value of the call to be higher than that of the corresponding
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put. At expiration, there is no time value left in either option. Because the
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call begins with more time value, its premium must decline at a faster rate
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than that of the put. Most modeling software will attribute the disparate
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rates of decline in value all to theta, whereas some modeling interfaces will
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make clear the distinction between the effect of time decay and the effect of
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interest on the put-call pair. |