1
$\begingroup$

I know "Time decay accelerates on nearing expiry". But I want to know the rate of acceleration.

  1. How curvy is the theta curve? Answers could be like,

Provided IV is stable, in a 3-month contract,

Month 1: time value losses 10%

Month 2: time value losses 30%

Month 3: time value losses 60%

  1. Does theta work following a standard curve every time? Or it has other factors to affect?
  2. It works same for all OTM, ATM and ITM? I read OTM options decelerate last month. Is that true?
$\endgroup$
2
$\begingroup$

The value of a call option that is near ATM can be approximated as $C(S,T)≈ 0.4 \sigma \sqrt T$. Therefore, under the unrealistic assumption that S does not change very much (i.e. the option stays near the money) the value decays as the square root of the remaining time.

In words, yes it does speed up considerably as you get close to expiration.

| improve this answer | |
$\endgroup$

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.