How options decay

Discussion in 'Options' started by trader76ab, Sep 27, 2006.

  1. I was wondering if anybody here can answer a simple question about theta. Do options decay continuously throughout the trading day or are they marked down every morning? Like if an option had a theta of 0.05, is that theta "broken up" over the whole day or is the option marked down around market open? Thanks to all the options gurus who read this and answer.
  2. Depends on the day. On Fridays and Mondays, you'll get some quantum effects in theta. Otherwise, on US options, it's virtually impossible to see any intraday theta until right before expiration. With spreads of at least .05, the bid may be an IV of 30%, and the ask an IV of 32%--wider than theta would cause a change of. (e.g an option with a bid of 1.05, and ask of 1.10 might have a theta of .02, so you wouldn't see it in the spread during the day)

    With KOSPI options with spreads of .01, who knows, you might be able to see it.
  3. MTE


    Generally, it is a continuous process, however due to the bid ask spread and a tick of 0.05 (US options) you can't really see it. Besides, even if the tick was 0.01 you'd need to hold everything else constant, which is impossible, in order to actually "see" decay.
  4. Generally, most institutions now use the number of hours until expiration in their pricing models. Like others have mentioned, with ticks at 0.05 and the other variables changing continually, you don't really notice it.
  5. Thanks for your reply and thanks to everybody else. I understand that everything else would have to be static in order to actually "see decay" but I think this might happen now and then once options switch to pennies.