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Can someone provide me with a robust way of calculating the future time value of an option or point in the direction? I have been reading a lot about the factors that affect it and about betas and deltas but i am yet to come upon a reliable way of calculating the future time value of an option.

PS: not asking for a prediction model, but something that could hint towards or give a range under certain constrains.

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  • $\begingroup$ if you do not want to calculate forward in time via Theta (i.e. the time decay factor of the option) have you tried tweaking the time to maturity to that future point in time - all else being equal (price, vola, interest rates) this should give you the future time value ... $\endgroup$ – GWD Mar 15 '15 at 10:41
  • $\begingroup$ Hey, could you elaborate a bit more. I think for short term the interest rate can be taken to be constant and volatility too (more or less). I did think of using theta directly; but then theta is derived from the BS model which though reasonably good still falls short of my expectations. Just to clarify, I am looking for more elegant ways to calculate theta. $\endgroup$ – cryptex Mar 15 '15 at 11:31
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There are a few careers dedicated to identifying better ways to compute the value of various sets of option contract terms under different assumptions. If beta is a Greek letter that comes to mind when, you could probably still get something out of the Wikipedia article on Black-Scholes. Branch from there.

If you want to move toward applications I would recommend the general treatments Espen Haugs - The Complete Guide to Option Price Formulas - if you want some calculators. It covers enough variations of numerical methods and terms that you could really use that material as inspiration for valuing many types of uncertain payoff. Paul Wilmott Introduces Quantitative Finance can help you build up some more mathematical intuition about option valuation.

There's not one good way. It's more of a field where designing a way for the particular situation is a liberal art and takes a lot of practice.

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Whatever pricing model you use you will almost always have the time to maturity as an input somewhere, agree? So if you have an option with a current time to maturity of e.g. 1 year, in order to get the time value in e.g. 6 months from now; you pretty much just run the pricing with time to maturity of 6 months as an input. No rocket science necessary there. A more elegant way to calculate any of the greeks would always be to fix all the other parameters and move the one parameter of interest by e.g. +1 and -1 (be it price, be it time, be it vola), run the full pricing again and then take the average of these (two) pricing results => voila - discrete greeks. Basically the only method to get there if you are using simulations.

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