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. http://www.elitetrader.com/vb/showthread.php?s=&threadid=124448&perpage=6&pagenumber=2
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.
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.