What will happen if a option writer sold option contracts on Friday afternoon (03:15 PM) and buy back it on Monday morning (09:20 AM) - Assume all other factors are stable? Will he get the full time decay value, that is 2 X Theata?
- time decay on inter-day
If I am writing option current day after noon (03:15 PM) and buy back it next day morning (09:20 AM), will I pocket the time decay? Or the time decay will only happen during market hours? inter-day time decay is not having any affect?
In totality, Time decay does not depend on market-hours, rather it depends on market-expectation and the days remaining for the expiry day.
If the expiry day is just 1-week ahead, you can expect more probability of pocketing the time decay in your inter-day/weekend trades. If the expiry day is 4-3 weeks ahead, probability of pocketing the time decay in your trades is almost nil unless the market expectation goes against the underlying.
The put option i purchased on 31st Oct was down by 7-8 rupees on Monday 03rd Nov.
This is when I realized purchasing options on weekend is a very bad idea.
Edit:
Assume you have Nifty 8300 PE contracts with you.
Today morning nifty opened around 8350
Lets check this.
Open option-price.com and use this calculator for time being.
Enter these values
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Underlying Price = 8350
(Nifty current price Opening price is around 8350)
Exercise Price = 8300 (Your strike price, 8300 PE)
Days Until Expiration = 25
(Expiry is 27 Nov, so 25 days left, you should include holidays also)
Interest Rates = 8.311
(You can get this rbi.org website, Top right side Market Trend--> Govt Securities --> 91 Day T bills)
Dividend Yield = 0
Volatility = 13.855 (You can refer INDIAVIX price in google finance for this, just an approximation)
Rounding = 2 (Answer will display in two decimal places)
Graph Increment = 1
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Click calculate now
You can see the put option theoretical price is 77.72
Actual option price was close to this around 74 I guess
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Now assume Nifty will open close to 8350 again on Friday
Number of days left is 23 now
Change 23 as days and check
Option price reduces to 74.49 (more than 3 rupees in 2 days)
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Now assume that nifty remains at 8350 or goes up and comes back to 8350 by next week end friday or opens at Monday 18th Nov at 8350.
Number of days left 11
The option price will become 49.34
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If it does not come down for whole month or during expiry stays at 8300
You can change 8300 in underlying and type 1 in number of days left.
Option price becomes 23.08
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Assume you need to get back your 88 rupees and nifty has risen up and gets corrected in the later part of the month
Nifty has to go below 8212 for you to break even.
Enter underlying price as 8212 and number of days remaining as 1 day.
The option price becomes 88.13
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This is assuming volatility and other parameters are same.
But in reality it will be much severe. Market sentiments would kill the option price in no time.
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Safe to assume Nifty has to break out below 8200 for you to come back into profit zone.
This is just an illustration, you should seek seniors to understand better.
Is that so? for exampleon 03-Nov nifty is almost no change (2 points) in this case, both 8300 put and 8350 call have reduced premium by 2 rupees each. (respective theta is around 2)
Please note, in the question, I have mentioned the assumption that all other factors remains stable. In this scenario I think we can’t omit theta though it is very less. Option writer would really want to collect these small premiums to fill there bags I suppose.
When the market opened on 3-Nov,if the market expectation was flat closing at the end of the day, it wud try to calculate the value of option premium for the next day open. If any opportunity available, it will try to eat the option premium values. The market expectation might go wrong on 5-Nov open, though. The 2Rs decrease in premium value on 3-Nov might increase by 5Rs on 5-Nov open by demand/supply mismatch. God only knows!
I bought Nifty Put 8300 on Friday around 3:25 with 85.35 Premium, Nifty was trading around 8320 and closed for that day around 8322. Option price closed around 84.95.
On Monday when Nifty opened close to 8340 and immediately came down to 8317 around within 5 mins, the option price opened around 74.85 (more than 10 points less compared to Friday).
In 5 mins around 9:20 Nifty was trading at 8326 and the option price further low to 73.65. (My expectation was option price would climb high again when Nifty dropped from 8340 to 8317 since that was a put option. The market sentiment was too bizarre) This is when I sold the option contracts at around 12 rupees loss, because I could not comprehend/understand this behavior and I don’t know what will happen next, unless I fully understand why options are behaving like this.
Sir same with me i also bought Nifty put 8300 on friday at avrg 88 hoping for some profit booking on monday but market ended flat but premium amount was much lowered to 74.I want know does time decay happens so rapidly…? Coz i’m still holding my contract hoping for some profit booking on thursday…
@Aftab
Even my friends are holding the put option, expecting market would go down.
Its upto you whether you hold it not.
You can calculate how much the Nifty should make a move, (considering time value is completely eroded) and if you are comfortable with that value, then you can hold on to your contracts.
Use this link http://option-price.com/
Put the days to expiration to a minimum and see how much the option price decreases, considering NIFTY stays flat. Use the INDIAVIX volatility as proxy for Volatility Index.
If that much the price would decrease, then calculate how much the NIFTY should go down in order to get you into profit zone.
You can use the same calculator.
@ AftabSajjadKhan, i think u r panicking by looking at the short term movement. You have bought the 8300put at 88Rs. So, Nifty should close at 8208(8300(strikeprice)-88(premium paid)-4(fees)) for the 8300Put strike to retain its value of 88Rs on expiry day. Now, analyzing NIFTY, previous structural high of NIFTY is at 8180. In another 23 days, Don’t u think NIFTY might try to touch 8180-8200 area?
Try to look at the bigger picture of the underlying before buying options.
@sdg I got your point, but will it be higher risk if we still hold the 8300 put while we loose our premium. What if nifty got uptrend and go higher highs from now?
In my opinion, what astroguru has done is right, he has stopped his loss but he should have analysed the trend and option greeks before he got into trade, basically there is no place for emotion in traders life.
@AftabSajjadKhan,
In my view, I think it is better to book the loss now. If you confirm the downtrend or profit booking you can re-enter the same trade or if you find uptrend you can go with the call option. As a trader, admit your mistake, retreat yourself and jump into winning trade. Speaking from my experience I have lost so much of money, just because of not having strict stop loss. Now I can find the difference using stop loss. I can survive even 10 consecutive bad trades using my stop loss.
@AastroGuru
Aastro ji, well done my friend, I think you have done the good thing, dont worry about even if nifty goes well below 8300. That would set you a bad example, may be you would have got profit if it goes below 8300, but if you try this next time with higher magnitude, you may end up with unrecoverable loss. We dont want that. Whatever you are now is better. Will enjoy the ride in winning trade, just exit the bad trade, thats it… good luck
@Arunkumar
Guess what, after selling the put option, I have altered my view and went bullish on Nifty. Bought 8300 CE options in trading range few times and recovered all the losses of the put option, as well as made some profits.
Hail Mary! Ride with the wind! Ride with the trend!
Keep aside the contrarian trading view for time being and plunge when the trend reverses.
Good that, it was positive climax at the end… be careful mate, we are surrounded by killers
I really appreciate your contribution on this forum… all good Qs and As, and comments as well…
@Aftab,
Don’t follow suggestion from anyone, follow your heart. Check for world indices. Most of them are down or sideways today.
If you need help with how much your option price would decrease (time erosion) let me know, I will explain you how to calculate it!
