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Hi John,
Can you plz explain the following
The change in theta for in the money and out of the money options is broadly linear. At the money options have the greatest time premium and greatest theta. Theta for at the money options does not change in a linear fashion, but changes more rapidly
as the expiry date approaches.
This is part of an examiner answer, I don’t understand how Theta for OTM & ITM option is linear.
Also, how ATM options have greatest time premium, OTM options are also likely to have large time premium, as all they have is only time value.He is only saying that they are broadly linear.
However there is no possibility whatsoever of being expected to write all that in the exam (the examiner always writes far more than is expected from students). The most that can be expected from you is a description of what the various Greeks are measuring. (Incidentally, lthough Theta is still in the syllabus, Vega and Rho are being removed as from June and so there is no chance of them now being asked 🙂 )
Also, can you explain why Gamma is +ve when Theta is -ve for option holders, especially for put option holders, as they have a -ve correlation with the value of underlying asset?
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