← AdvancedLesson 9 · 3:44
How far must it move to pay for theta?
Summary
You can find the break-even daily move where gamma pays back exactly one day of theta on a hedged option, and turn implied volatility into that dollar band. You can say who wins when realized volatility beats implied, and why the days left do not move the band.
Key terms
- break-even band
- The daily move size at which what gamma pays equals one day of theta for a hedged option.
- implied against realized
- The comparison between the volatility an option's price assumed and the volatility that actually came.
Check yourself
Answer each question to see why the right answer is right.
1. On the hedged call, theta costs about $6 a day. A $1 move pays about $2 and a $2 move about $9. What is the pattern?
2. For the $100 hedged call at 30% volatility, where is the break-even band?
3. How does the lesson turn 30% volatility into a daily move?
4. The example week moved like 42% volatility and the quiet week like 10%. The option was priced at 30%. What happened to the owner of the hedged call?
5. With 5 days left, theta grows to $14 a day and gamma to 11. Where is the break-even band now?
Finished the video and the quiz? .