V. 22:9 (57-58): Q&A by Don Bright

V. 22:9 (57-58): Q&A by Don Bright

SINCE YOU ASKED

Confused about some aspect of trading? Professional trader Don Bright of Bright Trading (www.stocktrading.com), an equity trading corporation, answers a few of your questions. To submit a question, post your question to our website at http:// Message-Boards.Traders.com. Answers will be posted there, and selected questions will appear in a future issue of S&C.

THETA DECAY

I read that you were once an options market maker. I have a question about theta. Do you know when an option erodes due to theta decay? Is it continuous throughout the day, or is it marked down at a specific time?

Thanks a lot riskreward

Theta refers to the daily reduction in option time premium. If you have an extra dollar of premium, and 20 days to go, you simply reduce your calculation by one day at a time. By using dates instead of actual days remaining, you dont have to concern yourself about weekends and holidays. The intraday time decay does take effect the last few days before expiration, especially on expiration day, when the stock is trading right at the expiration price of the operation. Then you might consider hourly calculations.

Traders generally use the mark-to-market daily close prices for calculations of all their greeks.