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Theta + (int Rate x Underlying price x Delta) + ( 0.5 x variance of underlying x Underlying price x Underlying Price x Gamma ) = Int rate x Option premium.
Strangle and straddles are delta neutral setup;For a delta neutral setup, the second term becomes zero; Hence,
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Theta +
(0.5 x variance of UL x UL price x Underlying price x Gamma)
= Int rate x option premium
Straddle and strangles have typically zero delta at initiation; they also have positive theta, meaning they gain over time assuming other components of option r constant ..
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In a delta neutral portfolio, if theta is largely +ve , Gamma will be -ve by a large extent to satisfy the above relation mathematically, which means that as expiry nears the strangles and straddles will have large -ve gamma; This is wat u see traders telling gamma effect.
