extrinsic value decrease

Gimpyron

Gimpyron

Hello mates
I hope you all have a good week so far.
Today a thought crossed my mind, is options extrinsic value decreases during the last day of the option's life?

let's assume I trade X option at the money. the expiration is today, and my option got 0.51 in extrinsic value.
lets assume the stock didnt move during the day at all, there is less then 10 min' to the closing bell.

is my option still worth 0.51 even due in 10 min it will worth completely 0 $??
 
tastytrade's answer:

Hi Ron,
If all elements were held constant, theta represents the decay of time at any point. If you notice, theta close to expiration becomes pretty high. This is because every minute that burns away are small portions of extrinsic value as the option approaches expiration.

On the final day of trading, extrinsic value in an OTM position will burn at an incredibly high rate and you'll see the ext at 9am will be very different from 1pm.

So for a long winded answer, your option will change ext value every minute as 3pm is 0.

seems fair to me
 
If the stock doesn't move as you stated in the OP the options intrinsic and extrinsic values will not change. Any change in the options value will be due to other factors.



:)
 
Gimpyron said:
tastytrade's answer:

Hi Ron,
If all elements were held constant, theta represents the decay of time at any point. If you notice, theta close to expiration becomes pretty high. This is because every minute that burns away are small portions of extrinsic value as the option approaches expiration.

On the final day of trading, extrinsic value in an OTM position will burn at an incredibly high rate and you'll see the ext at 9am will be very different from 1pm.

So for a long winded answer, your option will change ext value every minute as 3pm is 0.

seems fair to me
More...

If you want to paper trade, go to the weekly options, source out an ATM long straddle that's liquid with a super tight spread, and of course, in your zone. Buy on the Thursday before (expiration week) 3:55 pm, and sell Friday, the next morning, before 10:30 am. There is a window, but wait too long and you're in the house of pain.

This way you can see for yourself how time decay works near the end.
 
Gimpyron said:
let's assume I trade X option at the money. the expiration is today, and my option got 0.51 in extrinsic value.
lets assume the stock didnt move during the day at all, there is less then 10 min' to the closing bell.
is my option still worth 0.51 even due in 10 min it will worth completely 0 $??
More...
There's no absolutes with option valuation, but the ATM option will very likely lose considerable extrinsic value.

But it probably won't go to zero. It depends on the UL. It still might be trading at .05 or more at the close.
 
I've watched options closely on their day of expiration and, as I think most would expect, there is a huge change from the morning to evening.

OTM options will get killed in the afternoon and anything too far out of the money, even in the most liquid markets, probably wont have a bid by 2-3.

Basically what you see over the course of the day is an exaggerated move to 'fair value' in the options market as any value associated with time is shrugged off with each passing minute and you end up at a point where the option is simply worth however much its in the money (or 0.)

Fun to watch.
 
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