Here is a question that divides etiquette specialists and offer gentlemen two options only: be a chivalrous sexist and take the full bill, or be a stingy equalitarian and split the bill. The latters are even divided in sub-schools depending on how the bill should be split. 50/50 ? Each one pays for her/his consumption? Or should it be income/wealth based? It also seems that the first date or the second date may be treated differently. When it comes to dating, there are the splitters and the non-splitters. The non-splitters are easy and old school, no need for an army of quants to make computations for them… the splitters are complicated, they need a proper model, and they probably never agree!
When it comes to hedging options and financial products, the same is true. You have the ones who do not mark to market. They take it all on the first date, no need for rehedging, no need to split. Easy. But traders are splitters, sorry.
They mark to market. They use models on how to split the (theta) bill across time. Academic models are continuous so the theta bill is split in infinitely many parts: they assume that the underlying assets can be traded continuously, day and night and even on weekends. But reality is different, most weeks have only 5 business days. How to handle weekend days ? are they just normal days when the options decay by one day, but when the traders do not have the opportunity to make money (assuming long gamma) – that would mean splitting the theta bill in 7 and think in terms of calendar days. Another school, more recent, consists in ignoring non business days, so in practice you split the week in 5 business days (not necessarily equal.. I said splitters are complicated). Obviously, the way of splitting has consequences on how the volatility is marked and how greeks are computed.
On this very precise day, the debate between splitters is particularly important. Most markets are going to enter a 3-day weekend, for Switzerland it is even a 4-day weekend, and my heart bleeds for those exotic traders in Switzerland who ares 7-day splitters… on Tuesday morning they will be presented a 5-day theta bill. That hurts ! They will certainly pay it chivalrously… at the end it is a fair price for a long weekend filled with chocolate bunnies.
