How Does Time Decay Affect an In-the-Money Call Option?
Time decay, measured by theta, negatively affects the time value component of an in-the-money (ITM) call option's premium. As the expiration date approaches, the option's time value erodes.
While the intrinsic value of an ITM option remains, the overall premium decreases due to the loss of time value. This decay is less pronounced for deep ITM options but is a constant factor that reduces the option's total value over time.
Glossar
Time Value
Duration ⎊ The temporal dimension inherent in cryptocurrency derivatives, options trading, and financial instruments fundamentally defines time value.
Time Decay
Decay ⎊ The inherent characteristic of options contracts, time decay, or Theta, represents the erosion of an option's value as it approaches its expiration date.
Rate of Time Decay
Erosion ⎊ Rate of time decay, within cryptocurrency options and financial derivatives, represents the quantifiable decrease in an option’s extrinsic value as expiration nears, directly impacting profitability potential.
Impact of Time Decay
Impact ⎊ The impact of time decay, formally known as Theta, is the quantifiable reduction in an option's extrinsic value as its expiration date approaches, holding all other factors constant.