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chapter3/3 option term

Chapter 3

Option Term

The longer an option lasts, the more expensive it will be.

Option Term: The term of the option is the time between when the option is written and when it expires. The longer the term of the option contract the more expensive the option. The longer the term of the option, the higher the probability the option will become profitable.

The amount of premium associated with the time remaining for an option is the time value. The price of an option will decline as the expiration date approaches. This is known as time decay. The rate of this decline, or theta, is illustrated in the chart below and is non-linear; the rate of decline increases more rapidly as the expiration approaches.

The closer an option gets to expiration, the more rapidly the price will decline.

Price decline due to time decay


Data Provided by HistoricalOptionData.com
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