Time Decay Calculation

Discussion in 'Options' started by drader77, Jul 25, 2013.

  1. drader77

    drader77

    As a newb to options, I'm kind of playing around with the core concepts such as time decay.

    I want to be able to use a formula to calculate how much a particular option will decrease in value due to time decay at some point in the future. The reason I want to do this is I want to quantify how much a long call option has to increase over a period of time to offset the decay due to time.

    This would be useful to know in determining how far out into the future I should I choose an expiration so any gains in the value of the option are not occurring when the options loss due to time decay is accelerating the most.

    Thanks in advance for your assistance.
     
  2. Why don't you put such a calculator together yourself in Excel? It's a worthwhile exercise...
     
  3. Some broker platforms have the ability to do this as well.
     
  4. Josef K

    Josef K

    If you're looking to understand how time value is calculated, you need to study the Black-Scholes equation:

    http://en.wikipedia.org/wiki/Black–Scholes

    If you just want to be able to calculate future expected value of an option, than use the CBOE calculator linked to above, or better yet, get a free demo account with thinkorswim that will provide you with much nicer options analysis software.
     
  5. drader77

    drader77

    Thanks to all of you for your replies!!
     
  6. drader77

    drader77

    I would really prefer to do the calculations as you suggest in Excel. I just need a bit of a nudge in the right direction as far as the formulas/math is concerned.
     
  7. Well, you can start here: http://www.espenhaug.com/black_scholes.html