hard · Quantitative Finance derivatives
In the Black-Scholes PDE, the term -rV acts as a 'decay' term.
If an option is very deep in-the-money, how does this affect Theta (Θ)?
- Theta is driven primarily by the interest cost of the strike price rather than Gamma-related diffusion.
- Theta becomes positive because the option now behaves essentially like an outright stock position.
- Theta explodes toward infinity because the option is now certain to be exercised at final maturity.
- Theta and Gamma both remain pinned at their maximum levels no matter how deep the option is in-the-money.
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