Theta (time decay) of Nifty 6000 calls

#1
Hi
Theoretically theta (time decay) of options is said to be higher for options which are closer to expiry than option which are far from expiry (strike price remaining same).

But optionsoracle shows theta for various series of 6000 calls as :
June=-0.3
july=-0.5
aug=-0.67
dec=-0.92

Is there any discrepancy here.Anyone have any clues.

Thanks in advance.
 

DanPickUp

Well-Known Member
#2
Hi
Theoretically theta (time decay) of options is said to be higher for options which are closer to expiry than option which are far from expiry (strike price remaining same).

But optionsoracle shows theta for various series of 6000 calls as :
June=-0.3
july=-0.5
aug=-0.67
dec=-0.92

Is there any discrepancy here.Anyone have any clues.

Thanks in advance.
Hi

One fact you have to consider :

- Theta must be looked at in conjunction with volatility. Did you check the vola on this price examples you show ?

- Theta can be very high for out of the money options, if they contain a lot of implied volatility.

So, changes in IV have a direct effect on the time value.

DanPickUp
 

PGDIMES

Well-Known Member
#3
Hi
Theoretically theta (time decay) of options is said to be higher for options which are closer to expiry than option which are far from expiry (strike price remaining same).

But optionsoracle shows theta for various series of 6000 calls as :
June=-0.3
july=-0.5
aug=-0.67
dec=-0.92

Is there any discrepancy here.Anyone have any clues.

Thanks in advance.
Think in % terms rather than absolute figures... there lies the answer... :)
 
#4
I think as DanPickUp said, it may have to do with IV considerations for out of the money options.

Today, that is July 6, if you compare Theta for Nifty 6000 CE for July, Sep and Dec, you will find that the Theta for Dec is greatest, followed by Sep and then July.

However, for a near the money option, such as 5700 CE, Theta values are as you might theoretically expect, i.e. greatest for July, then Sep and then Dec.

Also, the value for July 6000 CE, is going to be too small and trades are going to be too few as it is far out of the money, and that may also affect things.
 
#5
Think in % terms rather than absolute figures... there lies the answer... :)
Can you explain this in detail with some example.
 
#6
Hi
Theoretically theta (time decay) of options is said to be higher for options which are closer to expiry than option which are far from expiry (strike price remaining same).

But optionsoracle shows theta for various series of 6000 calls as :
June=-0.3
july=-0.5
aug=-0.67
dec=-0.92

Is there any discrepancy here.Anyone have any clues.

Thanks in advance.
In general, what you say is right [Theoretically theta (time decay) of options is said to be higher for options which are closer to expiry than option which are far from expiry (strike price remaining same)].

I believe that the figures quoted by you from OptionOracle are correct. However, when I took the figures from OptionsOracle today (10.07.2011) for the 6000 CE options, the Theta values are as under:


July = -0.90
Aug = -0.99
Sept = -0.97
Dec = -0.89

These values appear to be more or less equal for different months.

Please remember that the values of Theta are absolute values (i.e., not in percentage terms, but in absolute terms). When you convert the values of Theta in percentage terms (on the option value), the Theta values may be the highest for the nearest month and the lowest for the farthest month in view of the reason that the option value for farther month would be much higher than a nearer month (keeping the strike price the same). Therefore, even if the farther month Theta value shown in your example is higher in absolute terms, if you calculate it on percentage terms it may actually turn out to be in fact lower than that for the nearer month. You cannot compare a ten rupee note with a hundred rupee note; therefore, you've to consider the percentage terms when comparing two options whose call values differ very much when comparing their Theta value.

It is correct to say that Theta value increases as the time approaches for the expiry of a contract. You can cross-check it from OptionsOracle by using the "Greeks Calc" utility therein.

Some other important things to remember about Theta are as under:

1. Theta measures the rate of decline of time-premium resulting from the passage of time.

2. Theta increases (for a given option) as expiration gets closer

3. Theta can be very high for out-of-the-money options if they contain a lot of implied volatility.

4. Theta is typically highest for at-the-money options

5. Theta will increase sharply in the last few days of trading.

Since, Theta depends hugely on the implied volatility, sometimes it may be higher for the farther month call options if their implied volatility is much higher as compared to the one for the nearer month. Therefore, sometimes there can be aberrations. Moreover, when you compare the percentage value of Theta (on the basis of option value) instead of its absolute value, the picture becomes more clear and the above rules become applicable more clearly, though some aberrations may still be there.

Hope it clears the doubt.
 

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