28 lines
1.9 KiB
Plaintext
28 lines
1.9 KiB
Plaintext
established, the theta is 0.009, just under a penny. If Disney share price is
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unchanged when three weeks pass, his theta will be higher. Exhibit 4.16
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shows how thetas and theoretical values change over time if DIS stock
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remains at $35.10.
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EXHIBIT 4.16 Disney 35 put—thetas and theoretical values.
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Mick needs to be concerned not only about what the theta is now but what
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it will be when he plans on exiting the position. His plan is to exit the trade
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in about three weeks, at which point the put theta will be −0.013. If he
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amortizes his theta over this three-week period, he theoretically loses an
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average of about 0.01 a day during this time if nothing else changes. The
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average daily theta is calculated here by subtracting the value of the put at
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23 days to expiration from its value when the trade was established to find
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the loss of premium attributed to time decay, then dividing by the number
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of days until expiration.
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Since the theta doesn’t change much over the first three weeks, Mick can
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eyeball the theta rather easily. As expiration approaches and theta begins to
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grow more quickly, he’ll need to do the math.
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At nine days to expiration, the theoretical value of Mick’s put is about
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0.35, assuming all other variables are held constant. By that time, he will
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have lost 0.45 (0.80 − 0.35) due to erosion over the 35-day period he held
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the position if the stock hasn’t moved. Mick’s average daily theta during
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that period is about 0.0129 (0.45 ÷ 35). The more time he holds the trade,
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the greater a concern is theta. Mick must weigh his assessment of the
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likelihood of the option’s gaining value from delta against the risk of
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erosion. If he holds the trade for 35 days, he must make 0.0129 on average
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per day from delta to offset theta losses. If the forecast is not realized within
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the expected time frame or if the forecast changes, Mick needs to act fast to
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curtail average daily theta losses. |