Exponential Decay of Option Prices

[Box]

I have an option price and I know that the option expires in 35 days. I also
know that option prices decay exponentially; decay increases as time to
expiration decreases.

How can I estimate the exponential decay in the option price from the 35 day
to the 34 day?

Rather than use an option pricing model I'm simply looking for an Excel
function that gives some sort of basic exponential decay value.

Thanks for your help.

 

[Jim Cone]

Maybe...

Value today in C2
Number of days remaining in D2
Formula in E2: =POWER($C$2,1/$D$2)^(D2-1)

With value today of 100 and 35 days remaining then
value tomorrow is 87.67.

If the above creates losses for you, please don't ask me for a bailout. <g>
--
Jim Cone
Portland, Oregon USA




"Box"
wrote in message
I have an option price and I know that the option expires in 35 days.
I also know that option prices decay exponentially;
decay increases as time to expiration decreases.

How can I estimate the exponential decay in the option price from
the 35 day to the 34 day?

Rather than use an option pricing model I'm simply looking for an Excel
function that gives some sort of basic exponential decay value.
Thanks for your help.

 

[Box]

The straight line erosion would be 100/35 or 2.857 so this solution is
obviously wrong. The resulting erosion for day 35 should be less than 2.857
since erosion accelerates as expiration nears.

 

[Dana DeLouis]

Hi. I think it depends on what you want to use as a decay factor.
For example, if we start with 100, and expect a value of 0.01 after 35
days, then perhaps...

k = LN(0.01/100)/35

then your equation is = 100*Exp(k*t)
as t goes from time 0 to 35.

If you assume an ending value of $1.00 after 35 days, then you get the
same solution as Jim's.
You are going to have to make some assumptions on the ending value for
this options pricing model.
= = =
HTH :>)
Dana DeLouis

 

[Jim Cone]

Just reverse the calculation ...
(current value in C2)

=$C$2-($C$2^(1/$D$2))^($D$2-D2+1)

For a list of daily values until expiration, fill column D with the days
remaining (35 to 1 > descending) and then fill the above
formula down adjacent to it.
As Dana said, some adjustments may be necessary.
--
Jim Cone
Portland, Oregon USA



"Box"
wrote in message
The straight line erosion would be 100/35 or 2.857 so this solution is
obviously wrong. The resulting erosion for day 35 should be less than 2.857
since erosion accelerates as expiration nears.