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

A trader is long a 3-month at-the-money call and short a 1-month at-the-money call, same strike, on the same stock (a calendar spread). What is the net theta position and its main implication?

Net theta is positive. Near-dated at-the-money options lose time value faster than longer-dated ones, so the short 1-month call earns more daily decay than the long 3-month call loses, and the spread profits if the stock stays near the strike.

  1. ANet positive theta, since the short near-dated option decays faster than the long far-dated optionCorrect
  2. BNet negative theta, since the long far-dated option decays faster
  3. CZero theta, since both options share the same strike
  4. DNet positive theta only if the stock moves sharply

Explanation

At-the-money theta is larger in absolute terms for shorter-dated options. The short 1-month call earns more daily decay than the long 3-month call loses, so net theta is positive and the spread gains if the stock stays near the strike.

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