Stocks & Commodities V. 28:10 (68-69): Explore Your Options by Tom Gentile
Product Description
Explore Your Options by Tom Gentile
DECAY RISK
I often hear traders discuss time decay as being a greater risk the closer to expiration that an option is. But if an option costs more with greater time remaining, wouldn’t that call or put carry increased risk, relatively speaking?
What you’ve heard discussed or read about is the nonlinear nature of theta with an emphasis on at-the-money (Atm) options. Theta is a greek factor that measures the daily rate at which a call or put will lose value, all else being equal from one trading day to the next.
During an option’s last month or so prior to expiration, this greek builds its role to reduce extrinsic or time value down to zero on a daily basis. Atm options are the most sensitive to this phenomenon, as they’re made up almost entirely of time value.
DECAY RISK
I often hear traders discuss time decay as being a greater risk the closer to expiration that an option is. But if an option costs more with greater time remaining, wouldn’t that call or put carry increased risk, relatively speaking?
What you’ve heard discussed or read about is the nonlinear nature of theta with an emphasis on at-the-money (Atm) options. Theta is a greek factor that measures the daily rate at which a call or put will lose value, all else being equal from one trading day to the next.
During an option’s last month or so prior to expiration, this greek builds its role to reduce extrinsic or time value down to zero on a daily basis. Atm options are the most sensitive to this phenomenon, as they’re made up almost entirely of time value.
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