Theta is NOT the P/L of an option

Discussion in 'Options' started by Amahrix, Jul 11, 2019.

  1. Amahrix


    In Dynamic Hedging, Nassim writes...

    "Almost one century ago, a young French mathematician named Gaston Bachelier had the insight (among other surprising intuitions) to write, in his doctoral thesis, see Bachelier (1900), that the expected price tomorrow of a call value was today's. He gave the right answer to what most option beginners fail to understand: that time decay is not expected P/L from an option. If the option is priced at the right volatility (assuming interest rates are 0), time decay will be expected to be 0."

    So what is the true P/L from an option if it is not theta?
    Philo Judeaus likes this.
  2. Robert Morse

    Robert Morse Sponsor

    Change in price - that simple.
    Amahrix likes this.
  3. newwurldmn


    Theta - gamma costs
  4. tommcginnis


    Theta is a fact -- Taleb and Bachelier notwithstanding.
    ETJ likes this.
  5. Amahrix


    I understand “theta is a fact” but my question is related to P/L of option not being from theta.
  6. Amahrix


    Can you elaborate for me? And make me aware of theta and gamma relationship.
  7. tommcginnis


    Your 'question' presupposes a wrong-headed premise: that theta does not belong being listed with the primary factors of an option's value. BSM gave us time, distance, rate-of-interest, and volatility.
    • Rho? Nobody talks about, as changes (since the 70s) have taken place outside of option life cycles. (Real Option studies are wonderful, though...)
    • Theta? You claim it a no-go.

    That leaves,
    • Delta and
    • "Vega"...

    o_O Since you know all this, I am left wondering what your real question is.
    ETJ likes this.
  8. destriero


    McGinnis, you are off your meds again.
    Last edited: Jul 11, 2019
    Philo Judeaus likes this.
  9. Amahrix


    All your answers so far has been to a question I never asked. Never said theta isn’t involved in option value, and never said theta isn’t a fact.

    Theta isn’t the source of a options P/L for trader.

  10. destriero


    You're correct, and your point?
    #10     Jul 11, 2019