How often is Theta, the decay of the option's time value, calculated?

F

Function1

The Black Scholes formula takes into account the number of days before expiration in its calculation for the decay of time value, but is it being calculated by discrete days or is it instantaneous? In other words, is the option value decaying throughout the day or only with each passing day?

The reason I ask is because I am generally selling OTM options close to expiration. In most cases the time value decay is mild, but as things get closer to the expiration date, each day can matter a lot and I want to make sure I am not missing something.

Thanks everyone!
 
As often as you want! So it is really a personal preference of the resolution you desire. I do 60 seconds to keep things simple (everything at 60-sec intervals)
 
Maybe I wasn't clear in my question. How often do option prices adjust for the passage of time. It is throughout the day or is more of a step function with each passing day?
 
It’s continuous. Though that’s not related to the rate of decay, which indeed accelerates towards expiration, and is calculated as continuously as at any other time.
 
Function1 said:
The Black Scholes formula takes into account the number of days before expiration in its calculation for the decay of time value, but is it being calculated by discrete days or is it instantaneous? In other words, is the option value decaying throughout the day or only with each passing day?

The reason I ask is because I am generally selling OTM options close to expiration. In most cases the time value decay is mild, but as things get closer to the expiration date, each day can matter a lot and I want to make sure I am not missing something.

Thanks everyone!
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you have to look at how each " greek" is calculated and come up with your own "formula", Time decay is subjective on IV( implied Volatility), Time decay from a technical point of view is for every second that elapses, Remember Long Term Capital in 1998...a good example of not to trust Black Scholes ...
 
Cool. In case anyone is interested, I took a few readings during the day with the closest to the money calls in Tesla expiring tomorrow. Slow and steady withering of extrinsic.

aFCPysr.png
 
"Theta is called rent by traders"

Have you ever incurred time decay phobia? lol

As far as its calculation, that is far beyond my comprehension, and yes I have many option theory books and every time I look at the formulas my brain buzzes.

Theres levels to these formulas too. The simple PDE formulas I can comprehend, but I'm talking about the real option theory books, the scary looking ones lol.

Just know theta goes hand and hand with gamma, theta is not an edge, but it will help you if you're short gamma.

"The alpha (gamma per theta ratio) will be the same regardless of the number of days to expiration."

And btw, its not just theta that reacts as expiration nears, all of the greeks normalize and work hard to complete the terminal distribution.

My question is why are you selling OTM in the weekies? Why not ATM? Just curious.
 
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