Time Decay
Time decay, also known as theta, is a financial term used to describe the rate at which the value of an option or other derivative security decreases as the expiration date approaches. Time decay is an important concept for investors to understand when trading options, as it can have a significant impact on the profitability of a trade. Time decay is also known as the option’s theta, and is expressed as a percentage of the option’s value per day.
History of Time Decay
Time decay has been used in financial markets since the early days of options trading. The concept of time decay was first introduced by the Chicago Board Options Exchange (CBOE) in 1973. Since then, time decay has become an important factor in options trading, as it can have a significant impact on the profitability of a trade. Time decay is also used in other derivative markets, such as futures and swaps.
Table of Comparisons
| Time Decay | Theta |
|---|---|
| Rate of decrease in option value | Percentage of option value per day |
| Introduced in 1973 | Used in options, futures, and swaps |
Summary
Time decay is an important concept for investors to understand when trading options, as it can have a significant impact on the profitability of a trade. Time decay is also known as the option’s theta, and is expressed as a percentage of the option’s value per day. For more information about time decay, investors can visit websites such as Investopedia, The Options Industry Council, and The Motley Fool.
See Also
- Option Premium
- Implied Volatility
- Delta
- Gamma
- Vega
- Rho
- Strike Price
- Expiration Date
- Options Trading
- Derivatives
