Sunday, December 8, 2013

The time decay chart of a put option adjusted by Delta

Time decay is a fascinating part of option premium selling strategy. In my quest searching for suitable time decay, I'd like to get clear picture in areas such as what are good entry and exit points that capture rapid option time decay in a option's life span. I had posted a conceptual OTM option time decay chart  and an actual OTM time decay chart before. This time, I further studied the time decay of my naked FXI put option sold 3 weeks ago with the help of ThinkScript.

Since option price changes with underlying stock due to the impact of Delta, I decided to observe the option premium decay after taking out the Delta-induced option price changes. The option time value in my study was restricted to changes due to volatility (Vega) and Theta mainly in this way:
Option time value = extrinsic value  =
previous price + Delta-induced change + sum of Vega and Theta induced changes.

Using a simple approximation of Delta-induced option price changes, I was able to chart the Delta-adjusted time decay curve of the naked put which took out the Delta-induced change in the above equation. The directional price change from Delta is calculated as shown below using ThinkScript:
plot TmValExclDelta = extrVal - ((absValue(Delta()) + gamma() * opChange)/2) * (opChange);
The entire script is downloadable for anyone who is interested. It can be used as a base for other option premium analysis. The resulted chart is downloadable in a PDF file if anyone needs to see a clearer picture.
As shown in the above chart, I found a few key points below. I think a picture is worthless a thousand words. There are other points that can be observed from it as well. Note the left vertical axis is FXI ETF price and right vertical axis is FXI Dec$37.5 put option price.
  • The FXI option price was high while its time value was low as FXI dropped below the strike price.
  • The FXI option time decay acceleration started at about 2.5 months before expiration.
  • The naked put sold at Delta around 0.3 and its time decay stayed close to the bottom downtrending line as FXI price consolidated for 3 weeks.
One of the interesting point to me is that this option started rapid decay around 2.5 months. If one sells the option on 2.5 months before expiration and exit it at around 1 month before expiration, he would capture a good amount of premium values with relatively smooth time decay as well. 


  1. Excellent analysis. Keep up the good work. I would appreciate your comments on the DOUGH website. Thanks

    1. Hi Vince,

      Sorry I did not know about the until a couple of days ago. It reinforced my impression that Tom Sonsnoff is an exceptional businessman while super trader Karen is the exceptional options trader.


  2. not able to view tos script.
    can you send it o

  3. Hi Charles ,
    Very good work indeed . Similarly , I am not able to view the TOS script , would appreciate it if you could email to Thanks a lot

  4. Hi Charles,
    Very good work indeed, I'm also unable to view the TOS script would you mind sending it to Thanks