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Unless you observe that volatility on Mondays is the equivalent of three
non-Monday trading days' volatility, how can it be right to adjust time
value by three days over the weekend?
DanG
Neal Chabot wrote:
>
> 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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