|
PureBytes Links
Trading Reference Links
|
RTs:
Having looked at several models, it seems like models very often use
calendar days. For example, CBOE gave away an option calculator that based
its theoretical values on calendar days. At the same time, I've also seen a
couple of option gurus that like to use trading days.
Practically speaking, I don't think it matters as long as the volatility
measure you input uses the same time frame, i.e., trading or calendar days.
Theoretically speaking, using calendar days is probably more accurate. It
should be remembered that the time value of an option not only includes
time over which an option can move (i.e., the more time left the more the
underlying can move) but also a carrying cost based on interest rates
(i.e., how much it costs the seller to hold the shares of stock he has
promised to deliver should he be assigned). Were carrying costs not
significant, interest rates would not be part of the options models. To
finish the argument, since interest rates are considered, it must be
remembered that interest is charged on a calendar day basis, not a trading
day basis, hence calendar days should be used.
One final non-theoretical thought, options traders generally consider the
interest rate component of a model the least significant by far.
Good trading,
Gregg Murray
At 01:18 PM 2/6/98 -0800, Richard wrote:
>>Is the time decay based on "Trading Days" or "Calender Days"/
>>
>>I beleive that the time decay is based on trading days. In this case, a
>>weekend
>>will not make a difference.
>>
>>Girish Patel
>>
>
>I disagree. The time decay factor of an option reflects the amount of time
>left until it expires. Two days less time until expiration is two days. The
>option doesn't know if the market is open or not (nor does it care).
>
>-Richard
>
>
>
|