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

Which factor would cause the absolute value of theta of an at-the-money European call option to increase most sharply, holding other inputs constant?

Absolute theta of an at-the-money call rises most as expiry approaches, such as when time to expiry falls to one day. Time value declines roughly with the square root of time, so decay accelerates near maturity for options struck near the money.

  1. ATime to expiry falls from three months to one dayCorrect
  2. BTime to expiry rises from one month to six months
  3. CVolatility falls substantially
  4. DThe stock price moves far from the strike

Explanation

For at-the-money options, time decay accelerates as expiry nears, because time value falls roughly with the square root of time. Theta in absolute terms is therefore greatest just before expiry. Longer maturities and moving away from the strike reduce absolute theta.

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