When time decay reverses
Time decay (negative theta) is the norm for long options, yet one of the following long European positions can have positive theta — it gains value purely from the passage of time, all else fixed. Which one, and for the right reason?
Show hints (2)+
- Value decaying time-value the discounting of any locked-in intrinsic value.
- For which instrument does a rising discount factor (as ) help the holder — a claim to receive the strike, or to pay it?
Answer
Reveal answer →Final answer
A deep in-the-money European put — its value is dominated by the discounted strike , whose present value rises as
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