Select the most accurate alternative. The theta of an in-the-money cash-or-nothing call option is
A) Positive, as is the case for any call.
B) Positive, because payoffs are the same once you are in-the-money and more time to maturity only increases the possibility of moving out of the money.
C) Negative, because payoffs are the same once you are in-the-money and more time to maturity only increases the possibility of moving out of the money.
D) Negative, as is the case for any call.

Question

Quizplus · Accepted Answer

Theta measures the sensitivity of the option price to time decay, i.e., it reflects how much the option value will change as time passes. In the case of an in-the-money cash-or-nothing call option, where the payoff is the same regardless of the stock price at maturity, theta is positive because the longer the time to maturity, the higher the chance that the stock will move out of the money and the option will expire worthless. Therefore, the time decay reduces the value of the option, as the probability of getting the payoff decreases.

Select the Most Accurate Alternative