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I believe the answer to this question depends on what you input into your
trading model.
Let's assume that the option expires in 30 calendar days.
So some would input 30 days into their software modeling program.
Others would input 20 days (or whatever).
On some days of the month, the two trader's models will agree on the
option value.
On other days of the month, especially weekends, the two models will
disagree.
The model that has 30 days will constantly erode, even on weekends.
The model that has 20 days will also constantly erode, but not on
weekends, which would have to be represented by a straight line.
Plotting these two curves on top of each other will give you a good idea
how they vary.
Two comments: 1. The interest rate calculation is insignificant to this.
2. If most market makers and traders are using the 30 day model, I
believe there would be a slight edge in waiting until Monday to buy that
option.
Neal
----------
> From: Richard <richard@xxxxxxxxxx>
> To: RealTraders Discussion Group <realtraders@xxxxxxxxxxxxxx>
> Subject: Re: option decay
> Date: Friday, February 06, 1998 2:18 PM
>
> >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
>
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