In recent research, it has been found that the time decay effect is more pronounced in Hong Kong stocks than in U.S. stocks. This difference may be attributed to the two markets’ different liquidity conditions and trading rules.
What is time decay?
The term “time decay” refers to the gradual erosion of the value of an option contract as it approaches its expiration date. This is because, as expiration approaches, the probability of the contract being In-The-Money (ITM) decreases. As a result, time decay is often referred to as “Theta”.
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There are several factors that contribute to time decay, including Volatility and Interest Rates.
Volatility measures the amount an underlying asset is expected to fluctuate over time. The higher the volatility, the faster the rate of time decay.
Interest rates also play a role in time decay. All else being equal, when interest rates are higher, the time value of options will decline at a faster rate. High-interest rates imply a more significant opportunity cost to holding an option contract. As expiration approaches and the chance of the contract being ITM decreases, this opportunity cost increases, resulting in accelerated time decay.
Intraday time decay in Hong Kong
In the financial world, “time decay” refers to the erosion of a security’s price over time. This phenomenon is especially pronounced in the case of intraday trading, where prices can fluctuate rapidly and violently. In Hong Kong, time decay is a well-known phenomenon, and many traders attempt to exploit it for profit.
Some strategies can be used to take advantage of time decay, but they all share one common goal: to sell a security at a higher price than it was bought for. Of course, this is not always possible, and sometimes the security’s price will continue to decline despite the trader’s best efforts. However, if you plan carefully and execute well, you may profit from intraday time decay.
How to trade around intraday time decay
There are two ways to trade around intraday time decay: buying and selling.