Calculating Option Theta (Time Decay) with MarketXLS

Option Theta (often referred to simply as “Theta”) measures how much an option’s price is expected to change for a single day’s passage of time, all else being equal. Using the opt_Theta function in MarketXLS makes it easy to quickly analyze time decay directly in Excel, helping you make faster, more informed trading decisions.

Why Use This Function?

• Evaluate the daily time decay of your Calls or Puts without leaving Excel.
• Compare your market option price against theoretical values to see if an option is fairly priced.
• Plan time-sensitive trading strategies by understanding how the option’s value decreases each day.
• Combine with other MarketXLS Greeks to build a comprehensive options analysis toolbox.

How to Use in Excel

=opt_Theta(currentStockPrice, marketOptionPrice, expiryDate, optionType, strikePrice, [riskFreeRate], [impliedVolatility])

1. In any cell, type the function name: =opt_Theta(…
2. Provide the required inputs as cell references or direct values for:
   • currentStockPrice
   • marketOptionPrice
   • expiryDate (must be a valid date)
   • optionType (“Call” or “Put”)
   • strikePrice
3. (Optional) Provide riskFreeRate if different from the default 0.045 (4.5%). If you pass 0 or leave it blank, it will default to 0.045.
4. (Optional) Provide impliedVolatility if you want a specific volatility input. If impliedVolatility is 0 or omitted, the function will pass 0 to the underlying calculation.
5. Press ENTER to see the returned Theta value.

Parameters Explained

Example Usage

Basic Examples

1. Basic Call Option Theta
   In cell A1: current stock price (150)
   In cell B1: market option price (5)
   In cell C1: expiry date (12/15/2023)
   In cell D1: option type ("Call")
   In cell E1: strike price (145)
   In cell F1: risk-free rate (0.045) (optional)
   In cell G1: implied volatility (0.2) (optional)
   Then in cell H1, enter:
   =opt_Theta(A1, B1, C1, D1, E1, F1, G1)
   This returns the Theta value for a theoretical Call option under the specified conditions.

2. Fast Input with Defaults
   =opt_Theta(250, 12.5, "06/30/2024", "Put", 240)
   This uses default risk-free rate (4.5%) and implied volatility (0) for a quick overview. The function calculates the option’s Theta based on your inputs.

Advanced Scenarios

• Multiple Option Scans
Use opt_Theta in conjunction with other MarketXLS Greeks (such as opt_Delta, opt_Gamma) across an entire table of different strikes and expirations to quickly compare daily time decay for diverse option contracts.

• Trading Strategy Analysis
Combine multiple Theta calculations for multiple expiration dates to understand which option could best serve short-term or long-term time decay strategies.

Common Questions and Troubleshooting

1. Why am I getting “Invalid option type”?
   – Ensure optionType is exactly "Call" or "Put". Any other value will produce an invalid type error.

2. How does the function handle risk-free rate if I don’t provide one?
   – If riskFreeRate is set to 0 or omitted, the internal code defaults it to 0.045 (4.5%) for you.

3. Why do I get “NA” as a result sometimes?
   – This typically indicates an exception during calculation. Check if your parameters (e.g., expiryDate) are valid or if the function inputs are numeric where expected.

4. What if impliedVolatility is set to zero?
   – It does not attempt to auto-calculate volatility; it simply passes 0 to the internal model. Ensure you are aware of this when comparing market or theoretical values.

Remember to test the function with a few different marketOptionPrice, riskFreeRate, and impliedVolatility inputs to see how Theta responds to changing parameters. By doing so, you’ll gain insight into how sensitive daily time decay can be under various market conditions.

Use opt_Theta in real-world scenarios to streamline your options analysis in Excel, saving time and helping you make informed decisions in the US market.