23 lines
1.1 KiB
Plaintext
23 lines
1.1 KiB
Plaintext
66 • The Intelligent Option Investor
|
||
still fall slowly. Time decay is governed by the shape of the BSM cone and
|
||
the degree to which an option’s range of exposure is contained within the
|
||
BSM cone. The two basic rules to remember are:
|
||
1. Time decay is slowest when more than three months are left
|
||
before expiration and becomes faster the closer one moves toward
|
||
expiration.
|
||
2. Time decay is slowest for ITM options and becomes faster the
|
||
closer to OTM the option is.
|
||
Visually, we can understand the first rule—that time decay increases
|
||
as the option nears expiration—by observing the following:
|
||
Slope is shallow here...
|
||
But steep here...
|
||
The steepness of the slope of the curve at the two different points
|
||
shows the relative speed of time decay. Because the slope is steeper the less
|
||
time there is on the contract, time decay is faster at this point as well.
|
||
Visually, we can understand the second rule—that OTM options lose
|
||
value faster than ITM ones—by observing the following:
|
||
Time BT ime A Time BT ime A
|
||
GREEN
|
||
GREEN
|
||
ORANGE
|
||
OTM option ITM option |