Greeks w.r.t. Time to Maturity

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Joined: Wed May 02, 2012 10:15 am

Greeks w.r.t. Time to Maturity

Postby abhishek.mokal » Wed May 02, 2012 11:29 am

Can anyone explain movement of different greeks with respect to 'Time to Maturity' (T)? Or refer some book/notes/link for the same ?

Graphs given in schweser notes explain mostly their behavious w.r.t. 'Underlying Asset' but I have seen some questions related to behaviour of Greeks for options w.r.t. 'T'.

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Re: Greeks w.r.t. Time to Maturity

Postby suresh.wadhwani2009 » Wed May 02, 2012 11:55 am

Dear Abhishek,

Greeks are used for measuring the sensitivity of options price with respect to change in underlying parameters (Stock, time, interest rate, volatility).

The greek which you are referring (sensitivity of option price with respect to time to maturity) is known as "Theta". Theta measures the rate of decline in option value with teh passage of time. Option value is composed of intrinsic value and time value. Intrinsic value is the value which you will get today if you exercise the call (you will get only for In The Money option), time value is the value that stock will move up or down in near future and get into the money. Deep ITM options have almost no time value.

So as the time passes, the value of option declines. At the money option has greatest time value in dollar/Rs terms.

For better understanding of greeks, pls refer Hull.

Hope it helps.

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