I was reviewing the P&L on a paper-traded short strangle and noticed that my AI was calculating theta decay using trading hours. My understanding was that Black–Scholes runs in continuous time, so I searched this sub expecting a straightforward answer. I did not expect the question to be this contentious.
So, uh, yeah, I know this has been asked before: does an option’s time value decay when the market is closed, including overnight and on weekends? Theta is a major part of the reason I put on a short strangle, so the distinction matters to me. From what I’ve observed, it does decay, but I’d appreciate a more rigorous explanation of what happens in the model versus what shows up in actual option prices.
I have a related question. I often see people say that beginners rely too heavily on the Greeks because they’re just model outputs. So what does a more experienced trader rely on?