Hello, In IB TWS they have a time value column which is displayed as an annualized percentage. This calculation uses all days, not just trading days. (I confirmed with them a moment ago.) So doing it this way, two different expiry's in the same week appear to have less or more value when they really don't. For example. Today is Friday, Monday is a holiday. There are 2 expiry's next week for the SPY, Wednesday and Friday. Besides today, Wednesday has 2 trading days, and Friday has 4 trading days. The program is showing the following time values. SPY Wednesday Bid - 0.06 - TV = 1.87% SPY Friday Bid - 0.10 - TV = 2.23% Wednesday - 2 trading days = 0.03 loss per trading day Friday - 4 trading days = 0.025 loss per trading day. LESS but higher time value? If I added today as a day it would still be 0.02 for both and not more for Friday Is this not what we all should be looking at? am I missing something? Thanks!!!!
IB uses a linear calculation for this. ((0.06 / 5) * 365 ) / 235.09 ~ 1.87%. IB uses calendar days -- that's the 5 and the 365 in the formula, not trading days.
OK. Thank you for your replies. I would like to add that, lets say, if we assumed 2 trading days went by, and all underlying's and imp vol were the same, we would loose 0.06 on Wednesday options (expires OTM), then would it not be ok to assume that the Friday option would go from 0.10 to 0.06, as it is now exactly 2 trading days from expiry like the other in the scenario, thus loose 0.04? So investing in the 2 day option each time at 0.06 would be more than the 0.10 for the 4 day (1 calendar week) Or could it be 0.0265 (0.10 / 7 days * 2 days to expiry)? That would make it quite a bit less for the same open market time left. We know that option are far from linear in time decay of course.
I think IB is looking at the Time Value in terms of "time left" at a given time rather than time decay. According to Option theory, the longer the expiry, the more time there is to have the higher probability of the underlying increasing/decreasing in value in the time left to expiration date to result in the corresponding options increasing in value and that is "time value" which is the extra value that is normally added to the intrinsic value of an option when valuing an option. Thus the longer expiry, i.e. the larger number of days to the expiration date, the higher the time value. And even though the closer an option gets to its expiry, the less time value there is for the option itself, but at any given time, if you compare two options that has everything else equal, the option with the longer expiration date would always have higher value and since everything else is equal then its intrinsic value must be equal, then the only difference must be their time value which must be larger for the option with the longer expiration date.