Google
 
Your Ad Here

Sunday, September 23, 2007

ALL Options Decay

All LEAPS, like any option, go down in value over time (assuming the stock price remains unchanged). Since there are fewer months remaining until the expiration date, the option is worth less. The amount that it declines each month is called the decay.
An interesting feature of the monthly decay is that it is much smaller for a LEAP than it is for a short-term option. In fact, in the last month of an option's existence, the decay is usually three times (or more) the monthly decay of a LEAP (at the same strike price). An at-the-money or out-of-the-money option will plunge to zero value in the expiration month, while the LEAP will hardly budge.
This phenomenon is the basis for many of the trading strategies Quite often, we own the slower-decaying LEAP, and sell the faster-decaying short-term option to someone else. While we lose money on our LEAP (assuming no change in the stock price), the guy who bought the short-term option loses much more. So we come out ahead. It may seem a little confusing at first, but it really is quite simple.

No comments:

money link

Google