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Saturday, January 9, 2010
Weekend Quote from a Book - Time Decay - the Advantage of Selling Options
Options are a wasting asset. This means that it takes a larger move in the underlying futures contract or equity for the option to be worth more money to the option buyer. That is why such a large percentage of options are closed out prior to expiration. Buyers know that the longer they hold their options, the better is the chance that the value of those options will decay to zero. In addition, the closer an option is to expiration, the more difficult it becomes for that option to increase in price and produce or increase a profit for the buyer. Whether taking profits or cutting losses, many people will rush to the exits before expiration day comes. As a seller, you have the luxury of just waiting it out, welcoming the inevitable. Some very inventive trading techniques have been created over the years, but nobody yet has come up with a way to stop the steady march of time.

- Source: The Complete Guide to Option Selling, Second Edition

by James Cordier & Michael Gross

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posted by Little Rishi @ Saturday, January 09, 2010  
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