How do you calculate for options with nearby expiration? Let's say for ES options expiring on 11/26 & 11/30. Right now it is about 1300 CST on Tuesday 11/23. For 11/26 expiry If I used DTE=4.00 today morning & use DTE=4.00 around 1500 CST, that is obviously wrong. What would you use? For 11/30 expiry What is DTE? Assume 11/23 as a whole day 11/23 11/24 11/25 (Holiday) 11/26 (early close; 1/2 day) 11/27 (Sat) 11/28 (Sun) 11/29 11/30 Is it 8? Or is it 5 (deducting 25th, 27th & 28th)? Or is it 4.5 (further deducting 1/2 day for 26th)?
If you need to be really precise then you should go with hours to expiry rather than days. For your second question, you use calendar days not trading days, so it's 8 days.
Thanks. This makes sense, and that's how I am changing the implementation details in my options spreadsheet I would be interested in hearing from others if there are any other approaches.
I would check the DTE in the options lab, it provides DTE for most commonly traded products, such as ES/FX/ZB/CL, etc. I think they use the calendar days.
I am not looking to do that. This is for my real time monitoring system of option positions (currently in a spreadsheet, but can move to some other system in the future). It must calculate the value in real time, and accurate DTE calc. is most important for options that is close to expiry. Take ES options expiring on friday. If you ignore tomorrow being a holiday, then you have DTE about 2+ days right now. Problem is, if you input the value of 2 in any options program, you would find ATM vol in ES options just to be over 10%. That is simply not correct. We have to take into account the fact the tomorrow is a holiday. If you do that, and use a DTE number just above 1, then you would get ATM IV of about 16%, which is more plausible (strong rally today with some vol. drop). This poses a problem. Clearly, market is in no mood to consider tomorrow just a regular day. But I am not favor of discounting it completely, because much can happen tomorrow when the markets are closed. What to do? Not sure, and that's why I am trying to get some feedback. But what I do NOT want to do is calculate DTE ignoring holidays & weekends completely, and instead work by continuously shifting my vol curve downwards before every holiday & weekends. That is just wrong Edit: Interactive Broker's TWS is indeed taking the former path. The ATM vols are barely above 10% in OptionTrader module as calculated by IB's option model. That is fine for them I guess: they can output something oddball for hapless clients - they don't actually have to trade off of it. As for us, how do we justify dropping vol from 17% to 10% just because tomorrow is a holiday? I feel changing DTE is a better approach than just dropping vol, which is not elegant and difficult to implement
BS model requires both DTE and calendar days in a year. I think they need to be consistent. i.e. if DTE includes the weekends and holidays, then use 365, otherwise, you have to come up with a number like 250 or 240 something, which people rarely use.