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