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A question about Theta

Discussion in 'Options' started by mc9320, Jun 18, 2014.

  1. mc9320

    mc9320 Guest

    The NDX Jul 3950 Calls with 30 days until expiration are priced at $3.50. These calls are out of the money so they are all time premium.

    With 30 days to go, $3.50/30 = -$0.116667 of time decay per day if it was a straight line. Theta in OptionVue and ThinkOrSwim is -$0.25

    Why is the difference so big between the straight line decay and the calculated option theta?
  2. jim

    jim Administrator Staff Member

    Theta is not linear. Theta is dependant upon three factors, namely: 1) time to expiration, 2) level of IV or implied volatiliy and 3) distance from ATM or "at the money" Theta is be larger when 1) there is more time to expiration, 2) IV is higher and 3) strike price is closer to ATM. These three factors are depicted in the attached images: Options Chain and the graph of Theta.

    Options - ^NDX_window_screenshot.png

    Options - ^NDX_window_screenshot.png

    Theta Graph - NDX_screenshot.png

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