What is the significance of time value in option trading?
Time value of money can be defined as “the idea that money available at the present time is worth more than the same amount in the future due to its latent earning capacity.” In other words, money in hand today is measured much more valuable than money in hand in the future, as the same can be invested now to get bigger returns in the future.
What is Options trading?
In Options trading, the buyer of the option invests a certain amount of money straight with a view to cash in on the investment at a later on period until when he can wait and watch the performance of the underlying asset and choose whether to exercise the option or let it expire by letting go of the money invested primarily.
The scope of earning profits from options trading comes as a package with what is called as “silent killer” for the option buyer, the decaying time value of the option. This is represented by the ‘theta’, time decay of an option indicates the lessening in value of the option as it is close to its expiration period.
What is analysis of trends?
In Option trading, for a buyer the technical analysis of stock price changes and movement trends is imperative to decide the time for which an option should be held and the right time to exercise the option. This is based on the actuality that at what point the intrinsic value of option will be the maximum.
The time decay rate is higher for options nearing expiration period and options with long expiration period are more often than not purchased to minimize the theta factor of the option.
Even though trading in options is not only about valuing the time decay and evaluating its collision on the options, however there are several other risk factors and pricing dimensions such as Delta, Gamma, Vega etc., which have to be premeditated closely for making productive option trading decisions.
Understanding and studying time value of money is a right way to start for decision making while settling on to trade in options.
Stock tips are provided by expert analysts which can be useful and analysis of time value impact on options by using the various tools available to help online trading of options.