← BeginnerLesson 10 · 4:40
Why do you lose money when nothing moves?
Summary
You can explain time decay: the time value draining out of an option as days pass, even when the stock never moves. You know the loss is not even per day and speeds up near the end for an option at the money. You can use the square-root effect to see why twice the time doesn't cost twice the price.
Key terms
- time decay
- Time value draining out of an option as the days pass, even when the stock doesn't move.
- decay is not a straight line
- square-root effect
- The distance a stock can wander grows with the square root of time, so four times the time gives about twice the option price.
Check yourself
Answer each question to see why the right answer is right.
1. You bought the $100 call for $345 with XYZ at $100. XYZ stays at exactly $100 for all 30 days. Where are you on the last day?
2. With XYZ held at $100, how do the first 9 days compare with the last 7 days?
3. The 30-day call with a strike of $100 costs $3.45. What does the 60-day call cost?
4. Why doesn't twice the time cost twice the price?
5. After 10 days, with 20 days left, XYZ has risen to $105. Where is the $345 call?
Finished the video and the quiz? .