Extrinsic Value and the Bell Curve Phenomenon
I have to say I was quite overwhelmed with the responses to yesterday's question.
Please folks, don't every one speak up all at once....lol.
Anyways, kudos to Jon for nailing down the answer. Though the SPY ratio spread was positive theta at inception, it has now turned theta negative.
Say what?
As a precursor to understanding how theta can often times flip with various types of option positions, one must first grasp the dynamics of option pricing and more specifically the relationship between extrinsic value and strike prices. One quick side note before we continue our stroll down option theory lane; extrinsic value is often times referred to as time value. Though they can be used synonymously, I prefer the term extrinsic value since time is not the only factor influencing this portion of an options price.
