Theta-Burn Baby Burn

Not only did the Greeks develop the modern farce that we call “democracy”, they also created an alphabet that has been much adopted in the mathematical asset pricing literature.

Theta has been adopted to represent the effect of a time increment on price and the term “theta-burn” refers to the rapid dominance of time on price as assets get close to maturity.

So what does democracy have to do with theta-burn? Those of you who have been watching the Greek Punch and Judy show last week (starring Papendreou as Punch and the EU as Judy) wil have noticed that the bond market is left trading way below par. Some short term bonds with less than six months to mature at 100, now trade in the 40’s. Unless default occurs, good old theta should soon kick in as there is a lot of ground to make up in the coming months. In fact, some bonds owe investors nearly 50 cents per day in increment alone.

Now that’s some serious theta-burn …