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I tried to calculate fair value of a stock options (IMNX, INTC, etc) in
OptionStation. The fair value changes over the weekend, provided other
components of the option price - price of the underlying, strike price,
volatility, risk free interest rate and the date- have been kept constnat.
According to two computer programs, a the option decay seems to ba calculated
based on calender days, and not the trading days.
I have answered my own question! Any comments TR's?
Girish Patel
David Michael Newman wrote:
> >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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