 |
Definition of 'Time Decay'
The ratio of the change in an option's price to the decrease in time to expiration. Since options are wasting assets, their value declines over time. As an option approaches its expiry date without being in the money, its time value declines because the probability of that option being profitable (in the money) is reduced.
Also known as "theta" and "time-value decay".
|
 |
Investopedia explains 'Time Decay'
Time decay of an option begins to accelerate in the last 60 to 30 days before expiry, provided the option is not in the money. But in the case of options that are deep in the money, time value decays more rapidly. The market finds these options too expensive compared to other strike prices or futures. As such, the holders of deep-in-the-money options nearing expiry discount the time value to attract buyers and in turn realize the intrinsic value.
The greater the certainty about an option's expiry value, the lower the time value. Conversely, the greater the uncertainty about an option's expiry value, the greater the time value.
|
-
Move beyond simply buying calls and puts, and learn how to turn time-value decay into potential profits.
Read More »
-
Employee stock options are a form of equity compensation granted by companies to their employees and executives.
Read More »
-
Find the middle ground between conservative and high-risk options strategies.
Read More »
-
-
Learn why option spreads offer trading opportunities with limited risk and greater versatility.
Read More »
-
With a single diagram, you can see how price, time and volatility affect potential gains.
Read More »
-
Discover how to find and use the most cost-effective ways to transfer risk.
Read More »
-
There are many key advantages offered to options traders who deal only in the underlying securities.
Read More »
-
Understanding price influences on options positions requires learning delta, theta, vega and gamma.
Read More »
|
|
