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Expected Time Value Decay of Options: Implications for Put-Rolling Strategies

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  • George F. Tannous
  • Clifton Lee-Sing

Abstract

Assuming the underlying asset price remains constant, previous studies show that the time value of an option decays gradually at a rate that accelerates over time and peaks at the expiration date. Thus, a significant portion of time value is lost in the four weeks leading up to expiration. This paper shows the time value of currently at- or near-the-money options should be expected to decay at a rate that decreases over time. The time values of options that are currently deep-in- or deep-out-of-the-money are expected to initially rise and then resume the normal decay pattern. Copyright (c)2008, The Eastern Finance Association.

Suggested Citation

  • George F. Tannous & Clifton Lee-Sing, 2008. "Expected Time Value Decay of Options: Implications for Put-Rolling Strategies," The Financial Review, Eastern Finance Association, vol. 43(2), pages 191-218, May.
  • Handle: RePEc:bla:finrev:v:43:y:2008:i:2:p:191-218
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