14 lines
899 B
Plaintext
14 lines
899 B
Plaintext
Theta
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Option buying is a veritable race against the clock. With each passing day,
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the option loses theoretical value. Refer back to Exhibit 4.3 . When three
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weeks pass and the time to expiration decreases from 44 days to 23, what
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happens to the call value? If the stock price stays around its original level,
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theta will be responsible for a loss of about 30 percent of the premium. If
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Disney is at $35 with 23 days to expiration, the call will be worth $0.73.
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With a big enough move in either direction, however, theta matters much
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less.
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With 23 days to expiration and Disney at $39, there is only 0.12 of time
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value—the premium paid over parity for the option. At that point, it is
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almost all delta exposure. Similarly, if the Disney stock price falls after
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three weeks to $33, the call will have only 0.10 of time value. Time decay is
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the least of Kim’s concerns if the stock makes a big move. |