Chapter 03 · Section 3.1

The loss of time value

For American options, we can simply say: The later the expiration date, the greater the time value.

We know now when time value is the highest. An important thing to know is how time value changes over time. This graph suggests that time value diminishes proportionally with time to expiration.

Is that close to reality? Please answer with yes or no.

a) no
• b) yes
  No. If you owned an option, would you be as concerned about loss of time value three months before expiration as two days before expiration.

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