Research topic: time value decay

Introduction

Time value decay is the ratio of the change in an option price to the decrease in time to expiration. Since options are a wasting asset, their value declines over time. As an option approaches its expiry date without being in the money, its time value declines since the probability of that option being profitable (in the money) is reduced. Time value decay is also known as "theta decay".

Time decay of an option begins to accelerate in the last 60 to 30 days before expiry, provided the option is not in the money (out of the money). In the case of options that are deep in the money, time value decays more rapidly. The market finds these options too expensive compared to other strike prices or futures. As such, the holders of deep-in-the-money options nearing expiry discount the nearing expiry discount the time value to attract buyers and in turn realize the intrinsic value. The greater the certainty about an option's expiry value, the lower the time value. Conversely, the greater the uncertainty about an option's expiry value, the greater the time value.

Requirement

In this research project, the following needs to be investigated:

  1. How can time value decay be measured objectively for different kinds of options?
  2. What are the market conditions that influence time value decay?

Profile of candidate

The following planning is proposed, each is expected to last about 1 month:

  1. Research solution and identify options for development: draft project proposal, investigate options for solution implementation including testing guidelines and storage guidelines.
  2. Develop and implement solution, including half term presentation.
  3. Write final report, including final presentation.

Introductory knowledge of mathematical statistics and financial engineering a plus.

Terms and conditions

The internship needs not be developed at the office, but can be performed at the university.

An internship reimbursement is applicable.

This project is expected to last 3 months. Although full time availability is recommended, this is not a strict requirement and availability of 3 days or more per week is acceptable. The candidate should be able to manage his/her own time and regularly update Hobury on progress and issues. Both an intermediate (half term) and a final presentation will be part of this internship assignment.

Copyright of the solution remains with Hobury.