On Wed, 2007-09-19 at 14:07 -0700, newbie73 wrote:
> When accessing an Option's Theta, how should I interpret this number?
>
> option.NPV() --> 2.18
> option.theta() --> -2.26
>
> My understanding of Theta is that it is the change per some set period of
> time in the value of the option. How can abs(theta) > NPV()???
The returned theta is the derivative of the price vs time---so it's not
the change, but rather the change per unit time. Therefore, its value
taken as a price change would be the change after one year (the time
unit.) True, it doesn't make sense that abs(theta) > NPV, but then
again it doesn't make much sense to take one year as the interval;
linearization breaks down (if you really wanted that, you'd have to take
higher-order derivatives into account. Quite a few of them, I'm afraid.)
What you can do is look, for example, at the change per day; that would
be theta()/365, which in your case results in -0.0085.
Luigi
--
Olmstead's Law:
After all is said and done, a hell of a lot more is said
than done.
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