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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?
A) Mondays ARE in fact more volatile than other days due to the weekend
effect, so just counting trading days will misprice the option. However
the Sat. to Mon. period is consistently less volatile then three
consecutive weekdays so a calendar day model doesn't cut it either. You
can find some middle ground but that starts getting complicated.
B) If most of the floor is using calendar days, it doesn't matter if
they're right, you've got to go with the (order) flow!
>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.
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