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Significance of Time Decay In Options

 

Investopedia.com defines time decay as "the ratio of the change in an option price to the decrease in time to expiration. Since options are a wasting asset, their value declines over time. As an option approaches its expiry date without being in-the-money, its time value declines since the probability of that option being profitable (in the money) is reduced."

 

If a option is out-of-the-money then its time decay will get more rapid as the expiration date approaches. If the option is deep in-the-money then the option's time value will deteriorate even faster. As a result, traders who have deep in-the-money options close to expiration would usually sell them at a lower price.

 

 

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