CFA Level I · CFA Level I Exam · Pricing and Valuation of Options
Compared with a short-dated option, a long-dated at-the-money option on the same underlying is most likely to have a higher:
The long-dated at-the-money option has higher vega. More remaining time makes the option's value more sensitive to changes in volatility, whereas gamma and the size of time decay are largest for at-the-money options close to expiration.
- Agamma.
- Bvega.Correct
- Ctheta magnitude.
Explanation
Vega rises with time to expiration because more time lets volatility affect the payoff probability. Gamma and the magnitude of theta are greatest for short-dated at-the-money options, so those are higher for the short-dated option.
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