Course Name: Options Volatility Trading: Concepts and Strategies, Section No: 7, Unit No: 24, Unit type: Quiz
In the answer to the question it is stated that "theta decreases (indicating faster time decay)." I thought that higher (increasing) theta, not lower theta (decreasing theta) indicates an increase in time decay.
Hi Kevin,
The statement "theta decreases (indicating faster time decay)" means that the theta value of an option is decreasing.
Theta is usually expressed as a negative number because it represents the amount by which an option's price is expected to decrease as time passes, all other factors being equal.
When theta decreases, it suggests that the rate at which the option is losing value due to time decay is accelerating. In other words, the option is losing value more quickly with each passing day.
In summary, when you see the statement "theta decreases (indicating faster time decay)," it means that the option is losing value at an accelerated rate due to the passage of time.
I hope this clears the confusion!
Hi Kevin, this query was answered here.
Thanks