What is the best way to calculate daily decay of a bought Option? Specially on Options on Futures contracts like Es/ YM etc ( Not stock option, Since the underlying is a futures contract there is no dividend) so if a 90 day ATM expiry option is say 90 points does that mean it will decay 1 point each day or the decay will be at as smaller rate initially and increases suddenly in last few days? assume that VOL has not changed
Theta-Does your software have Greeks? "Theta or time decay is not linear." https://www.optionseducation.org/st...ncepts/understanding_option_greeks/theta.html
The time decay is rather constant with respect to the number of "periods" remaining till expiration. So at 90 days till maturity, the decay of day 90 is approximately equal to the decay of day 89. But at 90 *hours* to maturity (approx. 4 days that is), the decay of hours 90 =~ decay of hours 89. At 1.5 hours to maturity, better update that decay every minute
Can you enlighten us on why you need to calculate it yourself (rather than use a tool as Robert mentions?) Are the tools available not accurate enough? -- To what precision do you require?
Hi Thanks Robert. I use IB and I will study Theta, But I am confused , you say the decay is not linear and Aquarians sort of says it is! am I reading it correctly? To answer "why I need to calculate": I was wondering if the following makes sense IF the daily decay of a 3 month option is less that the daily expiry option ( weekly option) Then perhaps something can be constructed that can have better risk reward!
Decay of near term options will be more than 3 month options. However, if the underlying moves a lot, the value of the spread goes down. You can't make money randoming buying calendars. You have to make assumptions including where the underlying will or will not go over time, and what will happen to the 3 month option IVOL over time. To make money, you are betting the market participants are wrong on their current pricing or you have assumption that are correct and will make the trade profitable.
For an ATM option, the theta can be estimated by: premium/2DTE... (this doesn't hold up entirely for out of the money options). So basically... theta increases exponentially getting closer to the expiry date. For instance, ATM put 30 days till expiry = 3.- theta = 0.05 - with 15 days to go, the price of the put is about 2.10 and theta = 0.07 - 5 days to go price is 1.20 and theta = 0.12 - 1 day to go price is 0.50 and theta = 0.25... ( but it is actually 0.50, since it's ATM and worthless at expiry on the strike and the theta over 1 day will be the total premium left with 1 day to go. So, the longer away the expiry is, the more linear theta appears... since X/(2*365) is almost the same as X/(2*264). But, when you get closer to expiry the increase gets bigger and faster... X/(2*5) is a relatively a lot smaller than X(2*4).