Let’s establish the basics

  • The time variable in Black-Scholes is T.
    • It represents the time remaining until expiry.
    • It is normalized to 1 year.
  • Most off-the-shelf pricing models define the year as comprising 365 days. This is known as a calendar day model.
    • T for a 1-year straddle equals 1. If one day elapses, T = 364/365.
    • If an option has 6 months to expiry, T is approximately .5. I say “approximately because .5 would actually correspond to 182.5 days
  • Some people use a business day model. Those models assume a 251-day year by subtracting 104 weekend days and 10 holidays. (Juneteeth is a relatively new holiday.)