medium · Quantitative Finance
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 is essentially a stock position.
- Theta explodes to infinity because the option is guaranteed to be exercised.
- Theta and Gamma both remain at their maximum levels.
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