Comment on Theta

Karthik Rangappa commented on 27 Dec 2018, 12:22 PM

Do correct me if i am wrong, but i don’t think the option premium is just the time risk+intrinsic val —> Certainly not, the premium is also a reflection of the volatility as well.

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 —- > how would account for this – RBI is coming out with monetary policy t’row. The expectation on street is that they will cut rates. Going by your explanation, OTM bank nifty should just have time value right? But this wont be true, cause the probability of option moving from OTM to ITM is high.

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… —-> But the decay actually happens on a continuous basis.

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