What this unit covers
Learn Theta, the value an option loses each day to time, and Vega, its sensitivity to implied volatility, the two Greeks that move value without the underlying moving.
By the end you will be able to
- Define Theta as the value an option loses daily from time alone.
- Define Vega as the value change per point of implied volatility.
- Calculate a net value change by combining Theta and Vega.
How it starts: A Loss That Was Not a Loss
- You hold an option that loses 2 rupees of value every single day.
- Overnight the market's expected volatility rises 2 points, from 20 to 22 percent.
- By morning your option is worth 1 rupee more than yesterday, not less.
Words you will meet
- Theta
- The rupee value an option loses each day purely from time passing, all else unchanged.
- Vega
- The rupee change in an option's value for every 1-point move in implied volatility.
- Implied volatility
- The market's expectation of how much the underlying will swing, not which way it will move.
- Time decay
- The steady loss in an option's value as expiry approaches, driven by Theta.
In this module: Option Greeks
- Delta & Gamma
- Theta & Vega (this unit)
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