How to correctly price Greeks on 0DTE/Expiration Day Options?

Atikon

Atikon

Hi Guys,

I'm constantly in disagreement with ppl who tell me that the BSM isn't applicable on 0 DTE (expiration day Options = 8/6,5h till settlement at premarket/market open) Options (Cash settled) and that it should be priced as a Knockout Option.

I remember @ORATS price 0 DTE at 95% of Gamme/Vega/Theta etc. at the opening and 5% within Minutes before the close.

What is the correct approach? And how does Theta decrease/Gamma contract over time on expiration day? I saw a private study where around 85% of Theta was done by 2pm, but I couldn't really find any papers on the subject.

Best

Ati
 
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Atikon said:
Hi Guys,

I'm constantly in disagreement with ppl who tell me that the BSM isn't applicable on 0 DTE Options (Cash settled) and that it should be priced as a Knockout Option.

I remember @ORATS price 0 DTE at 95% of Gamme/Vega/Theta etc. at the opening and 5% within Minutes before the close.

What is the correct approach? And how does Theta decrease/Gamma contract over time on expiration day? I saw a private study where around 85% of Theta was done by 2pm, but I couldn't really find any papers on the subject.

Best

Ati
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I think you may be better served using proper terminology. To many of us, zero (0) actually means zero (0)! You comments seem to imply > 0 and less than 1 only, but I can only guess. Think of "seconds till expiration" to get better understanding.
 
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stepandfetchit said:
I think you may be better served using proper terminology. To many of us, zero (0) actually means zero (0)! You comments seem to imply > 0 and less than 1 only, but I can only guess.
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Hey mate, edited it a little bit, hope it's clearer now
 
Atikon said:
Hey mate, edited it a little bit, hope it's clearer now
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I personally do not like trading options near expiration, however have noticed anomolies as options near expiration that are not characteristic of longer durations. The IV derived from the prices is less predictable (less likely to follow trajectory of the term structure IV ) with shorter terms which suggests one should focus more on the price action than greeks as you approach the event horizon.
 
Atikon said:
@Matt_ORATS do you guys have some stats on theta decline during market hours on expiration day? My expierience 10am -20% 12am -60% 2pm -80%-90%
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Hi Ati
No, we have not done those types of studies. I can discuss getting you some 2 minute snapshots of the entire market bid-asks if you want to do the work. We sell zip files of daily snaps. The files are large.
 
Matt_ORATS said:
Hi Ati
No, we have not done those types of studies. I can discuss getting you some 2 minute snapshots of the entire market bid-asks if you want to do the work. We sell zip files of daily snaps. The files are large.
More...
Hi Matt, how far does it go back? I'm collecting data for the past 7 months now.
 
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