Why Weekly Option Theta Decay Has No Fixed Daily Percentage

# Are there comprehensive analyses of theta decay in weekly options?


# Are there comprehensive analyses of theta decay in weekly options?












Are there comprehensive analyses of how much theta a weekly options loses in a day, per day?

I know what the shape of theta decay looks like, in theory, where the decay towards zero happens more rapidly the closer you get to expiration.

But with weeklies, an example question would be: do they lose 20% by first Friday (with the weekend theta decay getting priced in by market close), or is it 30%? 10%?

Assume the option is at the money, or 1 strike out of the money. This is the area where the extrinsic value will be greatest.

## Answer by DKM (score 12)

https://quant.stackexchange.com/a/2538

Theta decay doesn't depend on the in the moneyness. A 70 delta call and a 30 delta call have very close theta decay at any given moment. They are slightly different because of skew with 70 delta put having slightly bigger theta. Theta is the decay of extrinsic value.

In practical trading, you can assume your decay distribution (using your graph is fine) using a fair volatility but nobody can say for sure what the theta decay distribution ought to be. To answer that question isn't all that useful anyway. In practical trading and in the weeklies, decays are slower than the theoretical because people still have bids out there to close their position or the asymmetry of buys and sells. (People don't really want to sell pennies/nickels unless they're long already).

And theta really depends on the stock events because for a weekly on monday and an announcement is coming out on friday, there'll be almost no decay until friday. It becomes more of a break even play since you don't expect to scalp your long gamma.

Think about theta as the token to play the gamma game, with so few days left it becomes a break even game since these options will have smaller and smaller deltas.

## Answer by ProbablePattern (score 5)

https://quant.stackexchange.com/a/2509

While the time decay on the time value component of an option does not depend on how much the option is in the money, theta is the change in total option value not just the time value due to the passage of time. Time decay is higher for options that are out of the money assuming volatility and the risk free rate are held constant. This is because a greater proportion of the full option value is intrinsic value for an option that is in the money. An option that is out of the money has a greater proportion of its value in the time value of the option so the time decay will have a greater impact. If you don't want to work through the Black-Scholes model, you can also use the GBSCharacteristics function in the fOptions package within the R programming language to test for various input combinations.

The fundamental model of small changes in the derivative increasing to larger changes in the derivative as time to expiration decreases is true in all cases. What changes is the convexity. As volatility increases and all else is held constant, the change in the rate of time decay increases. Another way to look at it: as volatility approaches 0, the graph will approach a straight line but the top left portion will always have smaller changes than the bottom right.

## Answer by WOLO (score 0)

https://quant.stackexchange.com/a/38446

Theta does not decrease or increase with volatility; it's formula is based on its square root. The highest time value is ATM, not further away. And extrinsic value excludes intrinsic value. The answers on here are completely wrong. People should not be writing about options when they dont even know the basic formulas. Learn the Greeks. You're presenting false information which could severely affect investors.