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# Quick question on Theta

Discussion in 'Options' started by athlonmank8, Apr 10, 2008.

1. ### athlonmank8

I don't know if i've been calculating it wrong all this time or not but Theta has no direct correlation to price change correct?

For example.

Option trading @ \$1.00 and strike is \$10.

Underlying price moves \$5.

Delta: .1
Theta: .05

If price moves \$5 in 1 day calculation would be....

Delta*5 =.50
Theta 1*-.05 = -.05

Price 1+.50-.05 = \$1.45 after day 1.

I saw someone price it like this.....

\$1.00 + .50

then they priced theta by the price change -.05*\$5*1 day = -.25

1+.50-.25 = \$1.25

But that's not correct is it?

Refer to this thread bottom of page #3.

2. ### athlonmank8

Page # 2 sorry

3. ### Maverickz

I must apologize it was my mistake. When I made the original post it was late and I did the calculations in a hurry. Then when I reposted it did not double check my math. Here is how it should have been written:

I think what I did that night was subtracted the Theta from the Delta instead of the option price. In other words 0.1 - 0.05 = .05 then multiplied the result by the \$5 to get the .25 improvement making the option price 1.25 instead of multiplying the delta by price \$5 *.1 = .50 then subtracting the Theta of .05 to get the .45 price improvement which is correct.

Gamma is harder to calc in because if the stock price jumped \$4 on the first day, stayed the same the second day then rose \$1 on the last day the cal would be completely different than if it stayed the same the first 2 day then made the whole \$5 movement on the last day. Also just b/c the option has a Gamma of .4 today that might change tomorrow and affect the outcome.

This example also assumes that Theta is not accelerating over the 3 day period.

4. ### athlonmank8

Thanks Maverickz. I apologize for taking it to a thread. I know you know your stuff, so when I saw your post I couldn't figure out what the hell I was doing wrong. haha

Thanks again bud. I appreciate the response and the info.

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