Skip to content

FRM Part I · FRM Exam Part I · Option Sensitivity Measures: The "Greeks"

A trader holds a long position in a one-month at-the-money European call option on a non-dividend-paying stock. All else equal, which statement best describes the option's theta?

Theta is negative for a long at-the-money call on a non-dividend stock. The option's time value shrinks as expiry approaches, so with other factors constant its value falls. Theta is typically largest in absolute terms for at-the-money options near expiry.

  1. ATheta is negative, so the option loses time value as expiry approachesCorrect
  2. BTheta is positive, so the option gains value as expiry approaches
  3. CTheta is zero for at-the-money options
  4. DTheta is positive only if volatility rises

Explanation

A long option position has positive time value that erodes as maturity nears, so theta is negative. At-the-money options have the largest absolute theta. A zero or positive theta would not match the standard behavior of a long call on a non-dividend stock.

Did you get it right without looking?

One question tells you little. A timed set on Option Sensitivity Measures: The "Greeks" shows your real accuracy, how long you take and where you lose marks.

Practise Option Sensitivity Measures: The "Greeks"Free diagnostic mock

More Option Sensitivity Measures: The "Greeks" questions