Comment on Theta

Alok commented on 27 Dec 2018, 10:51 AM

Hi Karthik,

Do correct me if i am wrong, but i don’t think the option premium is just the time risk+intrinsic val.

The time to expiry for all options is the same…so of we go by the above norm…once the option goes OTM…all options (just otm, deep otm) should have the same val…which is not the case.

I think the OTM premiums factor in the probability of getting ITM and ITM premiums factors in the probability of getting OTM. (If this is correct, then why do we follow the BS Model that only includes time & intrinsic val)

Also, if theta decay is reflected the next day…then on what basis the OTM premiums lose value on the day of expiry…that would mean theta decay cannot be reflected in next day opening price…

Do let me kbow what you think…thanks!
Alok

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