Friday, 11 September 2015

Technical Parameters of Warrants: Theta

Theta, also called time decay, measures the rate of change in the price of a warrant as its maturity is running short while all other things being equal.

It can be expressed as an absolute value or a percentage relative to the warrant price (theta / warrant price).

Unless in some special circumstances, the value of theta is usually negative, reflecting the declining value of a warrant as time passes.

Depicted in a chart form, the slope of the curve of time value becomes steeper as the warrant gets closer to its maturity.

This shows that time decay accelerates as time passes.

Additional notes:

In percentage terms, time value has the biggest impact on out of the money (OTM) warrants.

The value of a warrant consists of intrinsic value and time value.

They vary in absolute and relative terms for warrants with different strike prices and maturity dates.

In the case of OTM warrants, their intrinsic values are negligible.

In other words, time value makes up most of their values.

Hence, they are more sensitive to the passage of time.

As for in the money (ITM) warrants, given that a large part of their value is made up of intrinsic value, they are less sensitive to the passage of time, and such sensitivity decreases as the maturity date gets nearer.

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