Time Decay


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".


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.

  1. Theta

    A measure of the rate of decline in the value of an option due ...
  2. DvegaDtime

    The rate at which the vega of an option or warrant will change ...
  3. Speed

    The rate at which the gamma of an option or warrant will change ...
  4. Deferred Option Month

    The latter month or months of an option or futures contract. ...
  5. Expiration Date (Derivatives)

    The last day that an options or futures contract is valid. When ...
  6. In The Money

    1. For a call option, when the option's strike price is below ...
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