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Strategies & Market Trends : Options
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To: Bridge Player who wrote (2302)2/7/2000 11:45:00 AM
From: edamo  Read Replies (2) of 8096
 
bp... re: "i agree with you that the implied volatility, as well as the amount of time until expiration,are the factors that determine the amount of time value of an otm option"

not quite accurate..."time value" is purely determined by the time remaining till expiration, the decay is not linear and can be calculated simply. volatility, implied or historical is not a component of time . four major variables which are stock price, striking price,time and volatility determine the price of the contract.

if all was considered time value as you concluded, the option price can easily be plotted....time is constant...the change in price of all options otm or itm is time decay...but more important volatility....time alone would mean that all otm options would progressively trade down, as long as the underlying is below strike....and we know this would make life too simple...
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