Question for the greeks experts

[Bry]

I am still pretty green about the greeks. If I see that the theta is 0.042 for a certain option, does that mean:

1. $4.20 of time value is eaten up that day?

2. 4.2% of the time value is eaten up that day?

3. 4.2% of the entire option price is eaten up that day?

4. Or something else?

Thanks.

 

[mutluit]

$0.042 of time value is eaten up that day.

You can calc it yourself by just doing
prem1 = BS(t, ...)
prem2 = BS(t-1, ...)

theta = prem1 - prem2

 

[TskTsk]

0.042 times the multiplier (usually 100) gives you the dollar value that theta eats away each day.

 

[Bry]

Thank you.