A closer look at Black-Scholes option thetas

Douglas Emery, Weiyu Guo, Tie Su

Research output: Contribution to journalArticle

1 Citation (Scopus)

Abstract

This paper investigates Black-Scholes call and put option thetas, and derives upper and lower bounds for thetas as a function of underlying asset value. It is well known that the maximum time premium of an option occurs when the underlying asset value equals the exercise price. However, we show that the maximum option theta does not occur at that point, but instead occurs when the asset value is somewhat above the exercise price. We also show that option theta is not monotonic in any of the parameters in the Black-Scholes option-pricing model, including time to maturity. We further explain why the implications of these findings are important for trading and hedging strategies that are affected by the decay in an option's time premium.

Original languageEnglish (US)
Pages (from-to)59-74
Number of pages16
JournalJournal of Economics and Finance
Volume32
Issue number1
DOIs
StatePublished - Jan 1 2008

Fingerprint

Black-Scholes
Asset value
Exercise
Premium
Call option
Hedging strategies
Option pricing model
Trading strategies
Time to maturity
Lower bounds
Decay
Upper bound
Put option

Keywords

  • Black-scholes option pricing model
  • Option theta
  • Time decay

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

Cite this

A closer look at Black-Scholes option thetas. / Emery, Douglas; Guo, Weiyu; Su, Tie.

In: Journal of Economics and Finance, Vol. 32, No. 1, 01.01.2008, p. 59-74.

Research output: Contribution to journalArticle

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